6 Reasons to Use Hard Money Loans

When it comes to financing options for real estate, the first place that comes to mind is getting a loan from either the bank or a credit union. Howev

When it comes to financing options for real estate, the first place that comes to mind is getting a loan from either the bank or a credit union. However, there is another alternative- a hard money loan. Despite their name, hard money loans are not that hard to acquire. In fact, there is less red tape involved than that of traditional money lending institutions.

Private investors or groups of investors pool their money together to provide hard money loans (HML) for real estate investments. People who typically borrow from hard money lenders are investors who:

  • want to renovate and flip a property
  • have poor credit
  • do not have enough capital for down payments
  • unable to meet income stipulations
  • plan to purchase a distressed property

For people in all the above categories, HML offers them the best real estate investment opportunities. Here are several of the benefits of acquiring a loan from a hard money lender:

  1. Faster approval

As a real estate investor, it’s imperative that you move swiftly. Many properties have multiple buyers, so you need you to get your finances in order and make a down payment as soon as possible. Hard money lenders are well-known for the speed with which a loan can be approved and funds released. While a traditional loan could take anywhere between 30 – 45 days to get processed, an HML will have you on your way within a week in most situations. The sooner you get the funds, the quicker you can start working on the project, which helps to run down overhead costs and allows you to make a higher profit.

  1. Less red tape

An HML aims at reducing red tape typically found in conventional financing options.  Hard money loan applications usually have less paperwork. They look past recent short-sales, bankruptcies, loan modifications, and foreclosures. Once the basic information about the property is submitted, these loans are typically approved very quickly. The speed with which negotiations are completed and an agreement is reached shortens the closing time and expedites the transaction process. It gives you a jump start in the right direction.

  1. Greater versatility

With a hard money loan, the investor has more room for negotiations. You can set the terms of the repayment schedule according to your needs. The ease with which an HML is approved and the speed with which funds are released helps you plan your renovation so that the work can be completed as quickly as possible. And because HMLs are short-term loans with a higher interest rate than the traditional financing institution, you need to aim at finishing the project as quickly as possible to reap greater rewards. The flexibility of the loan repayment schedule facilitates an appropriate exit strategy from the HML.

  1. Less focus on credit scores

Since the property that an investor plans on buying is collateral, the hard money lender is more concerned about the value of the real estate property and the borrower’s experience. They have the power to determine the loan amount and terms of hard money financing. This means the lender will not judge the application based on the borrower’s credit history or income.  

  1. Provide more opportunities

Because of the risk involved with fix-and-flip or distressed properties, a bank will not loan you money for them. HMLs are ideal for investing in real estate. Not only do hard money lenders understand the appeal of these projects, but they also provide investors with the opportunity to make a quick profit. Plus they provide up to 70% of the financing. This means that there is enough cash flow available for other lucrative deals on the market. You now have the chance to work on more than one project at the same time.

  1. No prepayment penalties

Hard money lenders are opportunists that are rooting for your success. They approve of planning resources and following a schedule. But when you finish a renovation before the allotted time, they appreciate a job well done. Some traditional financial institutions charge a hefty fine when a loan is partially or fully repaid before the set date. On the other hand, hard money lenders do not add on any penalties for early loan repayments. After all, they are investors who are in business to support other investors- another reason to use hard money loans over others.

Traditional lenders are in business to provide loans, and they have no experience in real estate. Conversely, hard money lenders are investors solely in the real estate market. They understand construction, the factors that influence the market, and your investment goals. They can offer advice on how to improve the resale value of the property and provide solutions to any of your problems. Consider working with hard money lenders a partnership, where both the lender and the borrower are on the same page. Just remember, it’s essential to select a company that is reliable, reputable, and experienced in the trade.

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