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Benefits of Hard Money Loans For New Investors

by EMCAP Lending 3 months ago in investing
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A hard money loan is a specialized financing tool that is becoming increasingly popular with real estate investors today. Sometimes real estate investors prefer to use hard money loans as bank loans typically have strict rules and loan terms.

Benefits of Hard Money Loans For New Investors
Photo by bruce mars on Unsplash

In addition, the borrower may take out multiple hard money loans at the same time and stagger projects.

Financing your property with a hard money loan may be the right move for those in the real estate business, but less experienced investors need to educate themselves on the subject so they can make the best decision for their specific project. Before applying, a potential borrower should know the main pros and cons of using a hard money loan.

What are Hard Money Loans?

Hard money loans are short-term, asset-based loans that provide cold, hard cash quickly – typically in just a few days. Here property acts as collateral for the funds that are borrowed, and the lender can take ownership of it if you default. These collateralized loans are granted by hard money lenders, which commonly fund fix and flip investors, landlords, and even commercial project developers.

Hard money loans can be provided by Individuals, investment companies and other private, nonbanking businesses. Besides real estate, other hard assets such as vehicles, equipment, machinery and precious metals could also secure the loan.

Typically, hard money lenders don’t look into your credit history. They mainly base the loan on the value of the collateral. It is impossible to borrow 100% of the asset’s value either, but rather only 65% to 75%. The lender wants to leave some room for profit in case you default.

Hard money loans can have high-interest rates and origination fees as the lenders are usually private investors that have to offset the risk of the loan.

The Main Advantages of Hard Money Loans

Fast Approval and Funding

Hard money loan approval and loan funding take place quickly, and this is one of the biggest advantages of using a hard money loan. There are even cases when the approval for the hard money loan takes place in one day.

The hard money lender has to consider the property, the amount of down payment, or the borrower’s equity in the property, the borrower’s experience (if applicable), the exit strategy for the property and make sure the borrower has some cash reserves in order to make the monthly loan payments. The approval will most likely be granted if everything seems reasonable in these areas.

Hard money loans can be funded within 3-5 days if needed, whereas it takes 30+ days for a bank to fund.

Few Requirements

Hard money lenders have few requirements when compared to bank loans. These requirements include the borrower’s sufficient equity in the property, enough cash on hand for monthly payments, a reasonable exit strategy and ample experience if needed.

Banks have lists of requirements that the borrower must meet to get approval. Banks also have a list of issues that prevents a bank from lending to a borrower. The hard money lenders can lend to borrowers with issues as long as the borrower has enough down payment or equity (at least 25-30%) in the property.

Banks also don’t provide home loans to self-employed borrowers or the ones who lack the required 2 years of employment history at their current position. A hard money lender would be able to provide a short-term loan (1-3 years) to enable the borrower to purchase their property. In the case of the borrower without sufficient employment history, they would be able to refinance out of the hard money loan and into a lower-cost conventional loan once they obtained the necessary 2 years at their current position.

Funding for Projects That Cannot be Financed Elsewhere

Hard money lenders may provide loans for projects that banks have no interest in financing. A fix and flip loan is a good example of when a real estate investor purchases a property with a short-term loan so that the investor can quickly make the needed repairs and updates and then sell the property. In these cases, the real estate investor may only need a 12-month loan which doesn’t work with a bank’s business model.

Banks have numerous issues that prevent the property from qualifying for a traditional bank loan. The issues could be related to the foundation, electrical or plumbing and could cause the bank to consider the property uninhabitable and unable to be funded.

While banks are extremely risk-averse lenders and are unable to consider a loan scenario that is outside of their strict lending criteria, a hard money lender would be able to provide a borrower with a loan to purchase a property that has issues preventing it from qualifying for a conventional bank loan. The borrower could then make the necessary repairs and refinance with a bank loan.

Conclusion

The benefits of a hard money loan are the same both for new investors and lifelong real estate entrepreneurs. Speed, convenience, and flexibility are the key elements that make the loan processing smoother letting the investors focus on the important tasks.

Easy-peasy hard money loans open doors for investors helping them to achieve their goals on-the-fly.

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EMCAP Lending

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