Are you looking to finance your next real estate project? You might have come across hard money loans, which are short-term loans commonly used in real estate transactions. Ideally, these are offered by private companies or individuals rather than traditional banks or financial institutions. But since these are also called “last resort” financing options, not everyone knows the eligibility criteria and whether or not these make a viable option. So, our financing experts will help you understand what hard money loans are, their pros and cons, and their characteristics so you can make informed decisions.
What Are Hard Money Loans?
Hard money loans are a type of short-term loan often used in real estate transactions. These are asset-based financing solutions where you, as a borrower, are required to submit collateral in exchange for the needed funds. The transaction is somewhat similar to short-term bridge loans and is an immediate financing form. If you are looking for quick access to a cash equivalent, these loans are a good option and can last up to three years. Hard money loans are popularly known for their speed, flexibility, and convenience. Here are their quick pros and cons:
Pros
- You can negotiate the terms, including loan duration, repayment schedule, etc.
- These can be closed pretty quickly compared to traditional loans.
- There is no condition for you to pre-qualify for a specific loan amount and base your search on it.
Cons
- The interest rates are usually higher for the convenience they provide.
- The origination and closing costs are also substantial, needing a larger down payment.
- The risk factor involved discourages lenders from providing long-term hard money loans.
Facts You Should Know About Hard Money Loans
There is a common misconception that hard money loan lenders are loan sharks, for they use the property you are purchasing as collateral if you default. But this cannot be further from the truth. Lenders often seek a win-win situation for you and themselves to avoid risky situations. Also, since every loan scenario will differ, you must know the basics of these funding options to make the right choice. So here are some facts about hard money loans to ensure you are benefiting from the transaction:
These Are Short-Term Loans
Hard money loans ideally have a 6 to 12 months term, although some may extend up to 2-3 years. This short-term nature means that they often have higher interest rates than traditional loan options, but they can be helpful for investors who need quick access to cash for a real estate project.
You Can Secure Hard Money Loans by Collateral
Hard money loans are typically secured by the value of the purchased or renovated property. This means that if the borrower defaults on the loan, the lender can take possession of the property to recoup their losses. Plus, some lenders can provide you with a fantastic deal (upon qualifying) in as little as two business weeks.
They Are Based On the Value of the Property
Unlike traditional loans that are based on the borrower’s creditworthiness and income, hard money loans are primarily based on the value of the property being used as collateral. It means that borrowers with poor credit or income may still qualify for a hard money loan if the property has a high enough value. If you default, the lender has the right to seize and/or sell the property to recover the losses.
They Are Used For Various Real Estate Projects
Hard money loans can be used for a variety of real estate projects, including:
- Purchasing and renovating properties
- Flipping houses
- Land development
They can also be used by borrowers who need to close a real estate transaction quickly but do not have the time to go through the lengthy process of obtaining a traditional loan.
They Have Higher Interest Rates and Fees
Because hard money loans are considered riskier than traditional loans, they often come with higher interest rates and fees. Therefore, borrowers should be prepared to pay a higher cost for the convenience and flexibility that hard money loans offer.
These Require a Personal Guarantee
A personal guarantee is a legal contract where you, as a borrower, will have to assume the responsibility of repaying the loan out of your personal assets in the event the property cannot be sold. It is commonly mandated for borrowers with insufficient assets or poor credit to offer as collateral.
The Loans Aren’t Strictly Regulated
It is important to thoroughly review the terms and conditions of a loan agreement before signing. Since hard money loans and lenders are not as strictly regulated by the same laws as traditional financing options, it is crucial to remain vigilant and clearly understand all aspects linked to the loan.
The Bottom Line
Hard money loans can be a useful tool for real estate investors who need quick access to cash for a future project. However, borrowers should carefully consider the costs and risks associated with these loans before deciding if they are the right choice for their needs. In fact, it is better to partner with professionals to navigate the complexities of obtaining a hard money loan and avoid making costly mistakes.
Work With an Experienced Lender to Make the Right Call
If you think hard money loans will suit your needs, we hope this article comes in handy. In addition to this, make sure to do your research thoroughly and make educated choices concerning your investment. If you require professional assistance, the Real Estate Funding Solutions team is here to help you fund your future better. We are a trustworthy and premier financing company handling several projects every year. Get in touch with us for more information on your options.