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The Pros and Cons of Hard Money Loans When Investing in Real Estate

The Pros and Cons of Hard Money Loans When Investing in Real Estate

Real estate investment has become the top long-term investment option for many investors. Investors who intend to buy and rehabilitate distressed properties often utilize hard money loans as they are short-term and interest only.

The funds can become available to investors as quickly as 15 days, helping investors compete with cash buyers to purchase their desired properties.

What Is A Hard Money Loan?

A hard money loan refers to asset-based financing where a borrower uses the physical property as collateral in exchange for funds. It is asset-based since the borrower uses the real estate property they invest in as security for the loan.

The loans are sometimes referred to as private money loans as the funding is from private lenders instead of financial institutions. The lenders determine the loan amount to be given by ascertaining the property’s value.

Traditionally, financial institutions lend money based on the borrower’s financial history and credit score. It is easier and quicker to find hard money loans than traditional loans. A borrower is still required to go through the underwriting process and ensure compliance with the requirements.

Of course, when taking out any loan, it’s important that you use professional, recognised lenders and that you understand the ins and outs of the agreement. This guide should help you to better understand the entire process.

Reasons Why an Investor May Need a Hard Money Loan?

Some of the situations that may cause an investor to seek a hard money loan instead of a traditional financing option include:

  • Low credit score and cannot, therefore, qualify for traditional financing options. Hard money lenders will often consider whether you can repay the loan.
  • It is a reliable financing option for investors who intend to repair and sell properties. Hard money lenders tend to be flexible when finding the best program for your intended projects.
  • An investor may try to avoid the banks’ tiring application processes, especially in the middle of a property investment deal.

Pros of Hard Money Loans

Hard money loans can be highly beneficial for borrowers regardless of their credit history. Some advantages of hard money loans include:

  • Fast and easy approval – The process of finding a hard money loan is often easy, and the investor can quickly access the funds. Hard money lenders consider the borrower’s equity, down payment, and general experience in the business. The loan is often granted as long as the borrower can prove they can sustain their payments.
  • Flexible terms – The traditional underwriting process is not used for hard money lending. Each case is evaluated individually. An investor deals with a private lender instead of a traditional financial institution. It can be possible to revise the loan details, such as the repayment schedules.
  • Approval amount – The private lender approves as much as the worth of the property when purchasing an investment property. When borrowing against a property you already own, the property’s value determines the loan amount given. It is in contrast to traditional financing options, where you have to qualify for a loan amount and then look for properties within the approved amount.

Cons of Hard Money Loans

  • High-Interest Rates – The interest rates offered for hard money loans tend to be higher than traditional loans. The high-interest rates are due to the increased risks assumed by the lender as they do not ask for full documentation of credit history or income.
  • Varying down payments per lender – Hard money loans require larger down payments than traditional financial institutions. Depending on the lender’s rates, the down payment may range between 25% to 30%.
  • No long-term loans – Hard money loans are short-term loans as most lenders only grant a short period before demanding full payment. Longer-term loans increase the lender’s risks.

Hard money loans are a faster option for real estate financing. It is important that you fully understand the lender’s terms and charges to reduce the risks involved.

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BDC 299 December 2022