A hard money loan is a real estate investor’s best friend because it is the quickest way to secure a deal. However, it can get complicated, so it’s important to understand the advantages and disadvantages before accepting this type of loan.
In this article, we’ll explain more about what a hard money loan is, the advantages and disadvantages, and when you should use this type of loan.
Hard Money Lending Defined
A hard money loan is a short-term loan obtained through alternative lenders. When compared with traditional loans, hard money lenders often have lenient criteria but stricter terms. Borrowers often turn to this type of funding after a mortgage or other loan application has been denied or to avoid the process of obtaining a loan through traditional means.
Advantages and Disadvantages of Hard Money Lending
Hard money lenders represent one of the best sources of capital for real estate investors. However, there are also a few disadvantages to keep in mind. Below, we will explore both of these facets of hard money loans to help you decide if this type of funding fits your needs:
There are several advantages of working with hard money lenders, including:
Speed of funding
The Dodd-Frank Act set regulations on mortgage lending, meaning that investors need lots of time to close a loan, often several months. However, hard money loans can be secured within days or weeks, depending on the negotiations.
Since you are dealing directly with an investor instead of with a traditional bank, terms can be negotiated.
Typically, the property that is being purchased acts as the collateral for the loan. In some cases, hard money lenders will accept other assets such as a residential property in your name or a retirement account.
No “Red Tape”
Many times, getting a traditional loan for an investment property is difficult. Traditional lenders consider certain credentials, including credit score, LTV ratio, DTI ratio, and other factors. The primary factor that hard money lenders are concerned with is the value of the property.
When working with a traditional lender, you must provide tax returns, leases, proof of income, bank statements, and more. On the other hand, hard money loans avoid all this hassle.
Potentially fund multiple deals
Traditional loans only allow funding for one deal at a time. Hard money lenders, on the other hand, allow investors to use other people’s money which means more than one deal can be funded at once.
Beat the competition
There are two things that a seller wants: cash and a timely transaction. A hard money loan provides both- which can help you beat the competition.
When considering whether or not to work with hard money lenders for your real estate transaction, there are also some disadvantages to consider:
The convenience of a hard money loan comes at a cost. Since the lenders are at a higher risk, the interest rate is often up to 10 percentage points higher than traditional loans, ranging from 10% to 15%. Other fees, such as origination fees and closing costs are also higher.
Shorter repayment schedule
The repayment schedule for a hard money loan is typically between 6 and 18 months, which is much shorter than a traditional loan. Therefore, it’s important to sell the property and make a profit as quickly as possible.
When Should You Use Hard Money for Real Estate Investment
While hard money lenders will issue loans for nearly any type of real estate, there are certain properties that are ideal for this type of funding. One of the most common hard money loan deals is house flipping. This type of project typically moves quickly which means investors don’t have time to wait for a traditional loan.
Do You Need a Hard Money Loan?
If you are a real estate investor looking to secure a deal quickly, you might want to consider a hard money loan. Contact Artis Commercial Capital to learn more about how this type of funding can help you.