Hard money loans are a great way to finance real estate investments, especially if the objective is to avoid more traditional lending practices. Hard money loans are designed to solve specific funding needs. Hard money lenders also take a different approach when providing real estate financing.
The most fundamental difference between ‘hard money loans’ and ‘traditional mortgages’ is that hard money underwriters primarily focus upon the collateral (the property) and the Loan-to-Value (LTV) instead of the borrower’s credit profile. In other words, the value of the collateral is considered more relevant to the lending decision than the borrower’s creditworthiness.
A hard money lender uses their own valuation method to calculate the maximum LTV when the hard money loan is being used to purchase a property.
So, when would it make sense to use a hard money loan?
Hard money loans are best used for those who need financing quickly or need short-term financing (lasting from a few months to five years at most). This is because hard money loans are expensive; their interests are higher than traditional real estate mortgages. However, many borrowers find hard money loans a great tool if they have the right need. For example, real estate flippers often use hard money loans as they rehab a property that is to be sold in just a short time. Most refinance the hard money loan or repay it when the home sells – typically within 12 months.
The bottom line: a hard money lender’s appeal lies in their ability to use their preferred valuation method to craft a first position lien loan to fit unique scenarios, and to do so quickly.
Buyers who will benefit from financing with a hard money lender.
Meet Mr. and Mrs. “We Need Cash”
Hard money lenders provide cold, hard cash. This type of financing can often be used in combination with other strategies to create a plausible financing transaction when there once was none. A seller will always find it hard to ignore all-cash offers. Hard money lending is a great option for real estate investors who in the market for a bargain.
Meet their neighbors: Mr. and Mrs. “We Need Financing Immediately”
Cash is king. It is all well and good when an investor stumbles across an exceptional real estate deal, but it will likely pass them by if they are without ready financing. Hard money lenders provide quick funding options which allow real estate investors to close those deals too good to pass by. Essentially, this type of financing allows investors to capitalize on those deals that require immediate decisions. The reality is that a borrower pays for the privilege of getting the cash they need immediately. The cost for this invaluable privilege is found in the form of higher interest rates.
And finally, Mr. and Mrs. “We Have Credit Issues”
One of the major advantages of working with a hard money lender is that the underwriters assess the loan application in accordance with their own credit criteria. Hard money lenders have the unique capability of crafting creative financing options that benefit both the lender and the borrower. Financial creativity that makes a deal work is an investor’s best friend.
The Takeaway
In order for a real estate investor to be successful, they must have a conduit to secure working capital, when needed. Hard money loans can often advance the investor’s business up to the next level. If you are new to this funding source, take your time to gain a proper understanding of the loan product. You might just discover that you have a need that can be met by a hard money loan.
