Hard money loans may only account for 1% of residential real estate loans, but the industry is growing. In fact, the residential hard money market is worth about $10 billion.
If you’re a real estate investor looking for some funding, keep reading to learn more about hard money lending. You may find that it’s the best choice for your needs.
What Are Hard Money Loans?
Hard money loans are short-term loans that use the property you’re paying for as collateral for the money you’re borrowing.
If you’re looking for a hard money loan, you’ll need to contact a hard money lender. These financial professionals help real estate investors like you fund everything from residential homes to commercial buildings.
When they determine how much to lend out, hard money lenders look at the current and future value of the property you’re buying. With traditional mortgages, the lenders only look at the current value of the property you’re buying.
Hard money lenders look at the future value of the home by taking the after-repair value (ARV) into consideration. The ARV considers comparable properties in the area and adds on market changes that could affect the value.
As a real estate investor, you’ve likely used this value to determine whether a property is worth buying.
Pros of Hard Money Loans
First, hard money loans offer a quick way to get the money that you need for your real estate projects. There is less paperwork because hard money lenders are less restrictive with their loans.
As you work with a hard money lender, you may also find that they can help you get the resources you need for your project.
Hard money lenders want you to succeed so that they can get their money. And, they’ve likely worked with real estate investors before.
Over time, these financial professionals have created relationships with real estate experts. So, you may be able to meet contractors, appraisers, and other real estate gurus.
Second, hard money lenders offer greater flexibility with their loan terms. Banks often tie fees and penalties to every little mistake you make.
Because hard money lenders are private, they aren’t likely to stress over small things. So, they’re less likely to penny and dime you throughout the loan.
Third, hard money lenders consider their loans on a case-by-case basis rather than using a standard underwriting practice. So, you can negotiate better loan terms that can fit your budget.
Lastly, hard money lenders provide a proof of funds letter that you can include in your offer to buy. This will make it more likely that you’ll get the property you want faster.
Cons of Hard Money Loans
One of the scariest parts of getting a hard money loan is that most of these loans come with higher interest rates and origination fees than traditional bank loans. These higher payments help private lenders offset the risk of lending money to you.
Likewise, lenders expect you to put down a down payment so that you have some risk with the loan, too.
Since hard money loans have collateral attached to them, you should keep in mind that you may lose your property if you’re not able to make payments.
Another thing to consider is that hard money loans are private. That means that there’s little to no regulation depending on the lender you’re working with.
You may find that some lenders give poor service or practice predatory lending. These are the kinds of lenders that give hard money loans a bad reputation.
As you’re looking for a hard money loan, you should make sure you’re working with someone who’s going to be fair and kind during your business relationship.
To determine this, you should talk with close friends and family to see if those you know have had experience with private lenders in the past. Otherwise, do your online research before signing anything.
Why Should I Get a Hard Money Loan?
If hard money loans are more expensive than traditional ones, you may be wondering why investors use hard money loans at all.
Well, there are several reasons for real estate investors to use hard money loans over other kinds of loans.
First, hard money loans are easier to get if you have a poor credit history. Banks are less likely to lend to you if you’re a new investor or have a less-than-perfect credit score. On the other hand, private lenders consider multiple factors, so you’ll be more likely to get the loan you want.
Hard money lenders are more concerned about the home’s value than your credit score. Plus, the home becomes collateral for the loan. So, hard money lenders are more likely to loan to you with this layer of protection.
Second, hard money lenders loan money out for a variety of reasons. You can use the money for fixer-upper projects, construction needs, or other real estate projects.
With a traditional bank loan, you’d need to specify what you’re using the loan for.
Third, hard money loans happen quickly. Bank loans require a long process of applying, underwriting, and approving. There are a lot of hoops to jump through, and it may take 45 days or more to get the money you need.
If you take too long to get your loan together, you may not get the property you want. Someone else could buy it while you’re waiting.
On the other hand, hard money loans happen quickly. Most of these loans occur within a week’s time. Hard money lenders aren’t as concerned with meeting strict guidelines or placing lending restrictions.
Where Can I Get Hard Money Lending?
Hard money lending is a great way to get the funds you need as a real estate investor. If you’re looking for a reliable lender, you can depend on our team at Stonecrest.
We work with real estate investors like you to work out the loans you need to be successful. Learn more about our team and contact us when you’re ready to get started with your first hard money loan.