Approximately 28.1 million Americans invest in real estate, but not all of them qualify for traditional financing. This is where hard money loans come into play. Hard money loans are a solid alternative to conventional financing, but they do have their drawbacks.If you’re looking to invest and are on the fence about taking out a commercial hard money loan, then it’s time to take the next steps. Learning the risks and benefits will help you move forward with your investments.Keep reading this guide to learn everything you need to know about the risks and benefits of hard money loans.
Overview of Hard Money Loans
First, it’s essential to understand more about what hard money loans are and how they work. Hard money loans, or bridge loans, are short-term loans primarily for commercial investment properties and other types of investment properties.Hard money loans are also non-conforming loans, meaning they don’t meet government purchase standards. Freddie Mac and Fannie Mae loans are examples of conventional loans that allow people to buy homes approved by the Federal Housing Agency (FHA).Hard money loans aren’t available at banks, so you’ll need to research to find an online lender or ask your realtor for recommendations.
How to Qualify
A hard money loan is a collateral loan since they’re usually based on the value of the property used as collateral. Therefore, hard money lenders don’t look at your creditworthiness as harshly as traditional lenders do.Usually, the lender will quickly check your finances and credit score. Hard money lenders aren’t looking for a particular score but will check for red flags like non-payment of past loans.
You should also have a solid business plan in place. The lender will want to know details about your plans for the funds and your level of experience with investing.Also, the valuation of the property you’re buying plays a key role. They’ll look at how much money you’ll make in equity and your down payment.Lenders also want you to have an exit strategy in case you default on your loan payments. Additionally, you’ll need to meet other basic requirements and submit documents like bank account information and assets.
What Are Hard Money Loans Used For?
Hard money loans are usually used by real estate investors who want to flip a home to make a quick profit. Since these types of projects occur quickly, it’s easier to have faster financing to get the job done.Hard money loans are also helpful for people purchasing an investment property that doesn’t qualify for a traditional loan. Many people with a poor credit history can’t get traditional financing, making hard money loans the best option.
Finally, hard money loans are often used to buy commercial real estate properties. They’re best for unique properties that don’t qualify for conventional loans.
Benefits of Hard Money Loans
There are hidden benefits to getting a commercial hard money loan instead of a traditional loan. You can use these benefits to grow your investments quicker than you would with traditional loans.
These benefits include:
Hard Money Loans Are Easier for Most People to Access
Getting a commercial real estate loan can be a long and complicated process. Commercial real estate loans involve a detailed view of your financial situation and can take many months to even get to the closing phase.On the other hand, commercial hard money loans are usually processed quickly. Some online hard money lenders can even give you funds within one business day.
Many people use hard money loans to fund investment properties if they’re in a financial crunch and need money quickly. Experienced lenders like PB Financial Group can quickly evaluate your situation and come up with the best loan for your needs.
Hard Money Loans Offer More Flexibility
Usually, private lenders offer hard money loans, which makes it easier for you to negotiate the loan terms.You won’t have much room to negotiate terms with conventional loans since they’re typically set in stone.As an investor, you can tailor aspects of a hard money loan to suit your needs. For example, hard money lenders are more likely to restructure payment schedules or eliminate specific fees like the origination fee.
Hard Money Loans Give More People Access to Funding
The fact is not everyone has good credit, enough assets, or can meet the requirements of traditional loans. It can be tough to get a loan at a bank, even if you have fair credit.What’s more, if you plan to flip and sell a home quickly, you’ll find that banks and other conventional lenders won’t lend to people who plan to sell quickly for a profit. This is because traditional loans are geared toward people that plan to keep their property for a while.Hard money loans can also meet your needs if you need funds quickly to help grow your investment.
Risks of Hard Money Loans
Even though hard money loans have many advantages, you must consider the risks involved before you commit to a loan. Remember, every type of loan has disadvantages; it’s just a matter of finding a balance with the loan you need.
These risks include:
Hard Money Loans Can Cost You More
Although hard money loans offer convenience, they can be fairly expensive compared to traditional loan options. Remember, the flexibility of a hard money loan will come at a cost.First, hard money loan interest rates tend to be higher than conventional loans. Not only that, but you’ll find other fees are higher, like:
- Origination fees
- Loan servicing fees
- Closing costs
While you can negotiate on some of these fees, the fact is lenders take more of a risk with hard money loans. Therefore, interest rates and certain fees will usually remain on the higher side.
Hard Money Loans Have Short Loan Terms
Remember, hard money loans are also known as bridge loans, so they offer bridge financing. This type of financing is meant to cover the gap and give you the quick cash you need to rehab a home and flip it for a quick sale.Due to this, they have very short loan terms. These terms typically range from 1 to 2 years, but some require you to repay the loan in less than a year.This can be tricky if you don’t have a clear idea of how the cash flow for your project will go. Overall, before taking out a hard money loan, ensure you’ll have the money to repay it at the end of the loan term.
Hard Money Loans Require a Larger Downpayment
Since hard money lenders look past credit scores and other credit issues, they usually require a larger downpayment than traditional loans. For commercial hard money loans, you’ll need a downpayment of at least 20 to 25% of the value of your property.If you can’t afford a significant down payment, you may find that lenders won’t come to a loan agreement with you.
Learn More About a Commercial Hard Money Loan
Now that you know more about the risks and benefits of a commercial hard money loan, you can take the next step to learn more.Do extensive research to find reputable lenders, and take the time to ask as many questions as you need. Doing more homework will help you get an even better understanding of hard money loans and how they can help you.
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