Understanding Hard Money Lenders: Guide For Real Estate Investors

Two things that are of great importance in real estate are capital and time. In fact, these two factors can be said to be everything; they can spell the difference between failure and success. Although traditional financing is dependable, the process is usually slow and ridden with a lot of paper-work and structure. Investors therefore have to look for alternative financing to be able to meet up with the demands of the industry.

One of the alternatives that investors can explore is hard money lending. This is a faster and more flexible route that’s to help those who need short-term capital for their property investment. So, whether you want to flip a house, acquire rental properties or are faced with a tight closing schedule, you need to understand how hard money lenders operate. An understanding of the process can give you the edge you need.

In this article therefore, we will examine the whole process, exploring the advantages and disadvantages and also help you determine when this option is the best route to take in your investment journey so, stay with us…

What/Who Is A Hard Money Lender?

A hard money lender is an individual or organization that provides short-term loans that are usually backed by assets- most likely real estate. Unlike traditional banks or credit unions, these individuals or organizations focus mainly on the value of the collateral (property) rather than the income history or credit score of the borrower.

The loans are typically useful for the following: –

• Fix and flip projects
• Real estate development
• Short-term bridge financing
• Time-sensitive property acquisition
• When a borrower cannot get traditional financing or it is taking too long.

Due to the fact that these credit facilities are high-risk for the lender, the interest rates and fees are usually higher than traditional loans. However, they make up for this in the flexibility and speed offered.

How Hard Money Loans Work

Below are some basic facts about this type of credit facility:

Collateral-Based Approval

Traditional banks or lenders usually look at the financial history of an applicant and this encompasses things like their credit score, employment debt-to-ratio income and others. Hard money lenders on the other hand are more concerned about the current or future value of the property used as collateral.

They would typically evaluate the present worth of the property and the projection of what it will be worth after redevelopment or renovations. This condition therefore, makes it is a suitable option for real estate investors who have equity in a property or a solid business plan whether their personal financial record is great or not.

You can visit this site: https://study.com/ for more explanation about collateral and how it works.

Shorter Terms

Hard money loans are often short-term which means they range between 6 months and 3 years at the maximum. This is based on the assumption that the borrower will fix and flip the property or refinance the loan into the conventional mortgage as soon as the value of the property increases.

Higher Interest Rates

Due to the fact that the risk for the lender in this case is high, the interest rates are usually higher. This often ranges from 8 to 15% in addition to origination fees and sometimes prepayment penalties.

Faster Funding

We have already mentioned that this loan type has a fast approval timing where funds can be approved and disbursed in just days unlike traditional lenders that take weeks or months. This comes in handy in a situation where a distressed property needs to be sold off fast or a competitive deal.

Pros & Cons Of Using Hard Money Lenders

Just as with every business venture in life, this option of financing comes with its advantages and disadvantages, we will list them below: –

Pros

• Speed
• Flexibility
• Credit Leniency – This is great for investors with poor credit or those with unconventional employments or source of income.
• Strategic Leverage – This provides borrowers with money so that they don’t spend much from their pockets which then enables them to access deals that they will otherwise not be able to afford.

Cons

• Higher Costs – These include interest rates and upfront fees
• Short Repayment Terms– This can add pressure if anything goes wrong with projected timeline.
• Risk of Foreclosure – Since the loan is secured by the property, you stand the risk of foreclosure in the event of a default. Click here for more information about foreclosure.

Conclusion

Hare money lenders can come in handy for investors who need quick money for execution of projects. However, this route is not for everyone. Before applying for this type of financing, you have to be sure that your timeline projections are solid so that you don’t run the risk of a foreclosure.

Furthermore, consider the higher interest rates and other risk factors involved. Once you have counted the cost, look out for reputable lenders with a proven track record and apply. Ensure you do your due diligence before partnering with any hard money lender so that you can achieve your goals.