One of the most effective ways to build wealth is through real estate investment. While this has been proven to be true, many people still find it difficult to invest in this market. For most of this folk, their reason is a lack of access to financing.
Traditional banks may offer mortgage loans to finance real estate ventures but as you can see here, the process is usually slow and the criteria difficult for many to meet. How then can folks who can’t wait for tradition lending institutions, or do not even qualify for their loans, invest in real estate?
One option that is offering alternative funding opportunities is hard money lenders. In this article, we shall look at hard money loans and what it entails.
What is a Hard Money Loan?
Hard money loans are credit facilities given on the strength of the value and potential of an asset (usually real estate). The lenders here are often not concerned about the applicant’s credit score, earning ability, income-to-debt ratio and all the other things that traditional lenders are concerned about.
For these hard money lenders, they just need to be sure of the value of the property being considered for purchase and its prospect in the real estate market. Once they are satisfied with these two factors, they can quickly make the required funds available.
This process is usually very quick which is why many investors turn to it when they need to close emergency real estate deals. The flip side is that this convenience comes at a price, which includes higher interest rates, shorter repayment terms and higher fees.
Important Components of Hard Money Loans
There are important points that you will need to be aware of before going for this type of loans. Unlike traditional mortgage loans, hard money loans operate under a different framework. They are also not as regulated as traditional lending platforms so you need to know exactly what you are getting into.
Some of the important operational components of this type of loan include the following:
- LTV (Loan-to-Value) Ratio – This is the main thing that hard money lenders consider before deciding on whether or not to approve a loan request. LTV represents the percentage of the property’s ARV (After Repair Value) that the lender will be willing to offer as loan. In general, hard money lenders will give between 60% and 75% of the property’s value as loan. This means that you will need to contribute whatever is remaining to complete the deal.
- ARV (After Repair Value) – This represents the projected value of the property after repairs and renovations have been carried out. This is different from the amount at which it was purchased. Since the LTV is based on the ARV, it gives allowance for you to make some profit when you repair and sell the property.
- Interest Rates – As we stated above, the interest rate charged on this type of credit facility is higher than what you will get from traditional lenders. On average, interest rates for hard money loans range from around 8% to 15%.
- Loan Term – Again, as we already stated above, these loans usually have shorter repayment terms. In most cases, you will have between 6 and 24 months to make the repayment. This is why they are best for quick real estate deals where the goal is to get your funds back quickly.
- Repayments – Monthly repayments are common in this type of loan, though they may require a balloon payment at the end of the term. In some cases, you may also be allowed to accumulate interest on the principal until the property is sold and the repayment made in full.
- Approval Time – Approvals for hard money loans can come in days. Again, this is what makes it a good option for people looking to quickly close real estate deal opportunities.
Who Should Use Hard Money Loans?
From everything we’ve discussed thus far, it should be obvious that this loan is not for everyone. Hard money loans are ideal for the following situations:
- Fix and Flip Investments: If you buy, fix, and flip properties, then this lending option may be right for you. This is because you can access the funds quickly, and you also plan to sell the property quickly to recoup your funds. This means that you will be able to make your repayments without issues.
- Purchasing Distressed Properties: If a property requires a lot of repairs, you are not likely to get funding from traditional lenders. However, since hard money lenders are concerned about AVR (After Repair Value), you have a good chance of getting the funds you need if the property is in a good location and has a good chance of being sold for profit.
- Quick Purchases: There are some opportunities that just show up, requiring immediate action. An example is a foreclosure auction. Should such an opportunity present itself and you need urgent cash to fund the purchase, hard money loans can be a good option.
- Bridge Loans: If you require access to quick funds to enable you to improve the value of your home so you can refinance with traditional lenders, a hard money loan can be used.
Unless your investment opportunity matches the criteria listed above, you may want to reconsider going for hard money loans. You can learn more about this here: https://fitsmallbusiness.com/.
Conclusion
Hard money loans can be a great help in the right situation. If however, it is used for the wrong investment, it can backfire. In this article, we’ve provided a basic guide to help you have a better understanding of this type of loan.
If you think it is right for you, then take some time to research lenders so you can find the one that will offer you the best deal. Be sure to get as much information as possible so you do not make the wrong choice.
