When investing in property to sell, you’ll often be looking at either foreclosed homes or houses that have a lot of work needed.
However, when applying for a traditional loan, it can be pretty tricky. Banks are wary of lending money for a property that doesn’t look to be worth very much, as they’d much prefer to know that they’ll get their money back promptly.
As such, if you’re struggling to obtain financing from the bank, hard money loans may be the way forward.
What Is Hard Money?
When referring to hard money real estate, hard money is how much you borrow from the lender. Different lenders will have different terms which you’ll need to commit to or qualify for.
Although hard money is how much you’ve borrowed, monthly interest will be added to the owed amount until it’s paid off. So, the quicker you can repay, the less interest you’ll pay.
Who are hard money loans for?
There are two main types of people who benefit from hard money loans: Those with poor credit scores and those looking to quickly invest in real estate.
When investing in real estate, the idea is to buy low-priced properties. But these tend to come with repair work and damage. None of this makes it a particularly risk-free investment for the bank. In addition, investors can often find it difficult to be accepted for a traditional loan, as the bank prefers to offer loans to those with a little more stability.
Those with poor credit will also find it difficult to secure funding from the bank – making it hard for them to own their own property.
The pros and cons of hard money loans
One major benefit of hard money loans is that they’re much faster than securing a loan from the bank. This is why they’re particularly good for those looking to invest in low-priced properties or foreclosures. These hot assets can come and go from the market incredibly fast, meaning you need to be ready with the down payment pretty quickly. A hard money loan can help that.
Another pro is that you can often borrow more than you would be able to with a standard mortgage.
When a bank offers a mortgage, they usually expect you to contribute at least 5% of the property’s asking price. Some even go as far as requiring 20%. With hard money loans, you’ll be given the full amount without having to put down a deposit. All you then have to do is pay the lender back plus any interest you gain along the way.
But of course, with any pro, there are downsides.
For example, interest rates are much higher for private lenders. They can be anywhere in the range of 10-20%! As there is a much higher risk the more money they lend, it’s in everyone’s best interest for you to pay back the loan as quickly as possible.
Another downside is that the time you have to repay the loan back is much shorter. While a mortgage might be 25 years, a private lender will prefer to have the money back within a few years.
When it comes to borrowing money, you’ll know what you can afford. After that, it’s just a case of deciding whether traditional or private lending is the best option for you.