Hard Money Loans for Real Estate Investors 101
Hard money loans for real estate investors are loans that the investor will make to a borrower that is used to finance a real estate project by the borrower. These types of loans are very often used by real estate developers who want to construct or remodel a project and then sell it for a profit. Hard money loans for real estate investors are also loans that are seen many times when people want to flip a house. They fix the house up by making the necessary repairs, updating kitchens and bathrooms, and then they sell the home for a profit.
Hard money loans are the loan that many prefer because they are easy and quick, with a usual time frame of between seven and 14 days. A hard money loan is sometimes called a Bridge Loan. It is not usually based on the credit worthiness of the borrower, but it is based upon the financial possibilities that lie within the finished product of the property itself. Lenders look at the projected value of the project upon its completion and base their decision on how achievable the goals are.
Hard money loans for real estate investors are sometimes an easier way for the borrower to go because the loan, as mentioned earlier, moves more quickly than obtaining a traditional mortgage. In addition, investors have more flexibility when it comes to negotiations and their terms may not be as rigid as a bank’s terms might be. The property itself is typically used as collateral for the loan; however, every so often a lender may allow the borrower to use a property they already own or some personal assets as collateral instead. Hence the point of more flexibility.
In the same way that there are benefits to hard money loans for real estate investors, there are also some hard disadvantages for borrowers. This type of loan comes with high interest rates, sometimes upwards of 15% to 18%. In addition, closing costs can be higher, as can origination fees and loan servicing fees. Another possible hindrance to a hard money loan is that the time allotted for repayment is generally much shorter than it would be with a conventional loan. Because the loan is extended with the objective of having the property finished in time for a quick turnaround, the agreement between the investor and the borrower is based on how long they believe it will take to actually turn a profit. Therefore, the loan must be repaid within the time frame agreed upon.
When all is said and done, hard money loans for real estate investors usually work well for borrowers who are already financially well off and need to fund a project quickly. By borrowing in this way they have the money they need to begin the work much faster than they would if they waited for a bank approved loan. However, because of the great possibility of fees that could be over the top, the suggestion is that the borrower take a little time to shop around for a lender who will agree to fees that are more sensible.
Hard money loans are excellent for certain types of situations. For instance, they are a good choice for the fix and flip, for land or construction loans, when the buyers credit history is tarnished, or when an investor needs to move quickly on a property. Often a borrower will be rejected by the bank for a traditional mortgage for reasons of, as mentioned, a tarnished credit history or insufficient income history if the borrower has not been at their job for long, even if their income at present is more than adequate. Under these circumstances it is obvious that the lender who sees their way clear to approve a loan may be taking on some risks. Most of these loans are guaranteed by property with a 30%-50% equity.
Hard money loans are fine for both residential and commercial real estate investing. There are many reasons why people choose commercial property investing. To do this one should understand commercial real estate investing basics and the reasons to invest in commercial real estate.