Top 5 Reasons to Use Hard Money Loans
A hard money loan is a type of loan that is secured by real property. Usually, hard money loans are short-term bridge loans. They are primarily used in real estate transactions, and the lenders are usually individuals or private companies, not conventional banks. It is an extremely popular practice for those investors who need the money for their projects fast and hassle-free. So when you are still uncertain or in doubt, what are the considerations, the factors to take into account, for getting a hard money loan? Let’s find out together.
You need a quick closing
Conventional banks typically take up to 30-45 days to finalize the process. When you are investing in a competitive market, speed is everything, and in many cases you simply don’t have the time to sit around waiting that long for your loan approval. Hard money loans provide exactly what’s needed – they usually take just about 3-7 days to get approved, so this is one great advantage.
You may not qualify for a bank loan
There are various reasons why individuals may not be qualified for a conventional loan. Typically, conventional loans are difficult to obtain as the banks have very specific underwriting guidelines, including the requirements to the borrower’s source of income, credit score, etc. A lot of real estate investors are self-employed, so they don’t meet an income qualification. Sometimes they have a low credit score. Whatever the reason for not meeting the bank’s requirements, hard money is asset-based, and most hard money lenders are more interested in the property than in a borrower.
The property is not approved for bank financing (might have structural issues or is vacant)
Banks’ underwriting requirements apply not only to the borrower but also to the property itself, and they are pretty tough. If the property has any sort of significant issues, it will fail to meet the strict standards, and the bank will turn down the loan.
A hard money lender will likely be looking more into the property’s investment potential and after-repair value than at its current condition. They see the problems (the ugly) but they also see the potential profit (the good).
Partnerships become too pricey with time
Newer investors tend to partner with more experienced investors in order to finance the deal and get guidance. This way, a newbie learns the ropes from a seasoned professional and an investor gets a good deal. In a long game, people do care about relationships. That’s why they end up partnering with the same people on their future projects, too.
But if your partner is bringing in the financing, you inevitably have to reward them by surrendering a huge chunk of your profits. If you use hard money loans instead, you get to keep 100% of the profits. So when the time comes when you require less help and are ready to give up the training wheels, it may be a perfect time to consider going with a hard money loan instead.
Hard money allows you to finance more properties than straight-up cash
Let’s say you have a half-million dollars to invest, just enough to buy one property. While it remains on your hands, you cannot continue investing, you simply don’t have enough available resources. Of course, you can refinance the property, but depending on its type and your goals, lenders tend to require some seasoning after the purchase.
By investing smartly, with hard money, you can pick a property and have more options available to you.
There are many reasons to use hard money, but we are not in the business of compiling laundry lists. Let’s just say that hard money is a great toоl to add to your investment toolbox. It’s not a perfect fit for every deal, but it comes very handy in certain situations.