The Benefits Of Purchasing Real Estate With A Hard Money Loan
July 16, 2021
When investing in real estate there may be a better option for financing besides using a traditional loan every time. While it is true that traditional loans have been used to successfully secure many types of real estate investments, obtaining a traditional real estate loan comes with a lot of challenges. There are tons of boxes investors must check for a traditional lending institution to agree to fund their loans. Luckily, these challenges do not mean that investors who do not qualify for a traditional loan should give up on trying to invest in the real estate market. To the contrary, many investors do not even bother to go through the traditional loan process to fund their real estate investments. If you’re curious to learn what investors do when they need quick financing at affordable rates, the answer to your next investment funding could be in securing a hard money loan.
What Are Hard Money Loans?
Hard money loans are investment loans given by individual investors or companies who lend money to investors that are secured by the asset they are lending money on. The asset itself is used as collateral to reduce the risk for both the lender and the loanee. Hard money loans are great for fast financing where investors need to purchase a fixer upper, quickly remodel the property and then sell it at a profit. Most of the time, hard money loans are short-term loans lasting from 1 to 3 years. With the shorter loan terms, they also carry higher interest rates than traditional financing options like primary mortgages. If you are considering whether or not a hard money loan is the right fit for you, here are three benefits you should consider before making a decision.
Traditional lenders usually take around 28 days to process and complete funding for a loan which is often way too long for fix and flip investors. If things are going well within those 28 days, investors could secure a hard money loan, purchase a property, and begin renovations. For that reason, hard money loans have become a very attractive alternative to traditional bank loans.
High Approval Odds
One of the biggest challenges facing real estate investors today is simply being approved for a loan from a traditional lender like a bank or government agency. Lenders almost always evaluate the applicant’s credit status and annual income before deciding whether they will approve the loan. A lot of times, banks will only provide a portion of the full loan amount, leaving the loanee with little to no choice but to find another way to fund the remaining balance of the loan in need. Hard money lenders, on the other hand, don’t typically consider the investor’s credit or their income. The main requirement for determining approval for a hard money loan is whether or not the loan amount is equivalent to the collateral on the property value being purchased.
You usually will have more flexibility when negotiating the loan terms for a hard money loan since they are funded by private investors as opposed to large financial institutions. You can usually customize the repayment options to suit your financial position which in return makes hard money loans very convenient, especially for someone who’s just getting started in the real estate business.
As an investor, you often have very few options with little turnaround time to secure the financing you need to purchase a property. A hard money loan can be a great fit because they do not typically come with all of the red tapes that come with traditional bank financing. If you decide to fund your next real estate investment using a hard money lender, try to avoid making and quick decisions. Make sure you evaluate the terms of the agreement, any fees that may be included, and what interest rates will be involved, so you can make a wise decision that is best suited for your needs.