If you’re in the market for real estate and need funds fast to complete the purchase, traditional lending may not be an option. Traditional banks and lenders take 30 – 60 days to approve loan applications and they don’t approve every person that applies.
A hard money loan, on the other hand, offers fast funding with fewer requirements than standard mortgage loans have.
Hard Money Loans Defined
Hard money loans are loans against a piece of real estate, usually an investment property. They are short-term loans that must be repaid quickly – usually one to three years. They ‘bridge the gap’ when traditional financing isn’t an option right now.
Who Qualifies for a Hard Money Loan?
To qualify for a hard money loan, lenders look at the collateral (the property) mostly. Unlike regular mortgage lenders, they don’t expect great credit scores or low debt ratios. They might look at this information, but they won’t let a low credit score cause you to lose financing.
As long as the property (collateral) for the loan is worth enough money, it’s easy to get approved. If you default on the loan, the hard money lender can take possession of the property and sell it to make their money back.
To qualify, generally, you need a large down payment (20% – 30%) and the ability to either refinance the loan in a few years or pay the loan off in full.
The Benefits of a Hard Money Loan
Hard money loans have the reputation of having high interest rates, but there are many benefits that offset the higher rates including:
- They fund fast. Hard money lenders can usually close a loan in a week or less, versus the typical 45 days regular lenders take.
- You might be able to make interest-only payments. This keeps your monthly obligation down making it easier to afford.
- You don’t need great credit (or any credit). Hard money lenders don’t focus on your credit score or history. They’ll look at it, but it won’t be the determining factor in approving or declining your loan.
When to Use a Hard Money Loan
You might wonder when it’s a good time to consider hard money lending. Here are a few key scenarios when it works well:
- Flipping houses – Most investors flip houses in 6 months or less. Since you don’t need financing for a long time, hard money loans often make sense.
- A fast sale – If you need to make a real estate transaction fast, hard money loans are usually available much faster than traditional loans.
- You have bad credit – If your credit stops you from getting approved for a ‘regular’ mortgage loan, you might have better luck with a hard money lender.
Hard money loans can be a great alternative to traditional financing. Whether you are flipping homes and only need temporary financing, or you don’t have the credit to qualify for anything else, it’s a great way to fill your real estate portfolio.
Contact us today to learn more about how hard money lenders work and how you can get approved!