As an investor, you know that timing is everything. You need to be able to move quickly when a good opportunity arises, and sometimes you need money to do that. Banks are often slow to respond, and their approval process can be long and arduous. That’s where a hard money lender comes in.
Hard money lenders are private individuals or companies that are willing to lend money to investors at a higher interest rate than banks or traditional lenders. These loans are designed specifically for people who need quick funding to take advantage of an investment opportunity. Here’s a look at how they work and some of their pros and cons.
How Do Hard Money Loans Work?
When you take out a hard loan money loan, you are typically borrowing against the value of a property that you own. The lender will appraise the property and then give you a loan for a certain percentage of the value. For example, if your property is worth $100,000 and the lender will lend up to 70% of the value, they would give you a loan for $70,000.
The interest rate on these loans is usually higher than what you would get from a bank or other traditional lender, and the terms are often shorter. You may be asked to repay the loan in as little as six months. In some cases, you may be able to extend the repayment period if necessary.
Hard money loans are usually used for short-term financings, such as when buying a property that you plan to fix and sell quickly. They can also be useful if you need to repair a property before you can get traditional financing.
When Should You Use a Hard Money Loan?
There are a few different situations when you might want to use a hard money loan. Let’s take a look at a few of them.
You Need to Move Quickly
As we mentioned, one of the main reasons to use a hard money loan is that you need to move quickly. If you find a property that you want to buy but don’t have the time to go through the traditional financing process, a hard money loan can be a good option.
You Have Bad Credit
Another situation when you might want to use a hard money loan is if you have a low credit score. Hard money lenders don’t typically check your credit, so this can be a good option if you have a low credit score.
You’re Flipping A Property
If you’re in the business of flipping properties, hard money loans can be useful. You can use them to buy a property and then sell it quickly for a profit.
You Need To Make Repairs
If you’re buying a fixer-upper, you may need to make some repairs before you can get traditional financing. A hard money loan can give you the funds you need to make those repairs so that you can get the property up to code and then get refinanced into a conventional loan.
Where Can You Get a Hard Money Loan?
Hard money loans are typically provided by private individuals or companies rather than banks or other traditional lenders. There are several different sources you can tap into if you’re looking for a hard money loan.
Real Estate Investment Lenders
One option is to go through a real estate investment lender. These are companies that lend money specifically for real estate investments. They will often have a network of private investors who are willing to provide funding, and they may also lend their own money. Real estate investment lenders typically have a good understanding of the market and can help you find the right loan for your needs. However, they may charge higher fees than other types of lenders.
Equity Companies
If you’re looking for a hard money loan, equity companies can be a good funding source. Equity companies use the value of your property as collateral for the loan, so they’re often willing to lend more money than other types of lenders. And because they’re primarily focused on the property value rather than your credit history, they can be a good option for borrowers with a low credit score. If you’re considering a hard money loan, equity companies should be at the top of your list.
Asset Lenders
If you need a hard money loan, asset lenders can be a great resource. Hard money loans are typically given to borrowers with a strong asset base but may not qualify for traditional financing. Asset lenders will evaluate your assets and offer you a loan based on their value. This can be a great option if you’re looking for quick funding and don’t have time to go through the traditional lending process.
What Are the Pros of Hard Money Loans?
There are a few benefits that come with hard money loans. Let’s take a look at a few of them.
They’re Fast
One of the biggest advantages of hard money loans is that they’re fast. If you need money quickly, this is definitely the way to go. The approval process is typically much faster than traditional loans, and you can get funding in as little as a few days.
They’re Flexible
Another advantage of hard money loans is that they’re flexible. Unlike traditional loans, which often have strict requirements, hard money lenders are more willing to work with borrowers on tailor-made loan packages. This means that you can get the exact amount of money you need, with terms that work for you.
They’re Ideal for Bad Credit Borrowers
If your credit score is low, getting approved for a traditional loan may be difficult. On the other hand, hard money lenders are often more willing to lend to people with bad credit because they’re using the property as collateral. This makes hard money loans an ideal option for people with low credit scores who need quick financing.
What Are the Cons of Hard Money Loans?
Of course, some disadvantages come with hard money loans. Let’s take a look at a few of them.
Somewhat-Higher Interest Rates
One of the biggest drawbacks of hard money loans is that they often come with higher interest rates than conventional loans. As they’re considered high-risk loans, lenders charge higher interest rates to offset their risk. If you’re considering a hard money loan, compare interest rates before deciding which lender to work with.
Lower Loan-To-Value (LTV) Ratios
Another downside is that these loans typically have lower loan-to-value (LTV) ratios than other loans. This means that you’ll need to put up more collateral to get the loan, which can be a problem if you don’t have a lot of equity in your property.
Risk Of Losing Your Property
One of the biggest risks of hard money loans is that you risk losing your property, similar to foreclosure of a conventional loan. Because the lender uses your property as collateral, they can foreclose on it if you don’t make your payments. This is a big risk to take, so make sure you can afford the payments before you take out a hard money loan!
The Bottom Line
Hard money loans are a great option for people who need quick financing. However, they come with some risks that you should be aware of before you decide to take out a loan. Make sure you understand the pros and cons of hard money loans before deciding.
Ready to weigh your hard money lending options? Contact Bridgepoint Capital today to start the approval process for your next real estate project.