You’ve decided to go into the house-flipping business, or maybe you are facing foreclosure on your home and need help. You may think these two items don’t go together, but they can be financed in the same way.
How a Hard Money Loan Works
Hard money loans are often used by developers and flippers who need a short-term influx of cash for an investment. Those with high home equity, but are about to be foreclosed on, may also use a hard money loan.These loans are secured by property and are not tied to the borrower’s credit. The loan has a short repayment term, usually less than a year. It’s based on the property’s value and usually comes with a high interest rate.
Hard Money vs. Traditional Financing
There are many differences between hard money and traditional financing.Who Offers Hard Money Loans
Hard money lenders are not traditional banks. They are generally private investors or companies that specialize in these types of loans.
Hard many lenders aren’t subject to the same regulations as traditional loans. They can make their own rules about debt-to-income ratios or credit scores. It’s basically the Wild West of lending.
How Much Do Hard Money Loans Cost?
Hard money loans are expensive money.They can also be more expensive depending on the lender’s loan-to-value ratio. If the lender will only finance 70–80 percent of the property’s value, you'll need a sizable down payment.
Hard Money Loan Risks
If you’re flipping houses and don’t sell the house in time, you may miss a payment. A hard money loan has high interest rates. But add that to the high downpayment and shorter repayment period, and you can dig a hole for yourself. You must have a plan to cover your loan regardless of what happens.Why Use a Hard Money Loan?
The costs of a hard money loan are higher than those of a loan from a traditional bank or government lending program, but the hard money lender is taking on more risk.The advantage to you is that you’ll have faster access to capital. You’ll also deal with a less stringent approval process.
This type of financing works well for flippers because they need cash quickly. It doesn’t make sense to take a 30-year loan for a few months while you sell the house.
If a great deal on an investment property appears, a hard loan may be a good option. Money lenders are usually investors, too, so they’re more apt to approve these kinds of loans.
For people with credit issues, a hard money loan may be the only option. They are sometimes used by homeowners trying to prevent foreclosure.
You can use a hard money loan as an alternative to a bridge loan. A bridge loan is a cushion for those buying and selling a home simultaneously. But if you don’t qualify for a bridge loan, you could use your house for collateral to free up funds to buy a new house.
Weighing the Circumstances
Typically used by real estate investors, developers, and flippers, hard money loans are a short-term solution.A hard money loan can be arranged quickly, as opposed to a traditional lending institution, which can take months to approve a loan.
But, as we said, loan terms are short, usually three to 36 months.
Hard money loans are expensive. It is wise to have a plan to pay the loan back during the term. There are no regulations regarding hard money loans, so buyer beware.
