Over the years, hard money loans have become the go-to option for most real estate investors. The fast-processing rates and the less-tedious application process make them attractive. This is especially true for people with a bad credit history or those in need of quick financing.
In this article, we’ve covered how a hard money loan works. We’ve also highlighted the steps you can take to improve your qualification chances.
What is a Hard Money Loan, and Should You Go for It?
Hard money loans are short-term bridge loans used to purchase or refinance real estate. They have few qualification requirements and faster processing taking days to less than a month. Private money lenders offer these loans at slightly higher rates than the market price. That way, they are common among real estate investors.
Here are some reasons why a hard money loan would be a good idea for you.
- If you are buying a property in need of significant repairs. These loans will allow you to renovate distressed properties before flipping them for a profit.
- You are in a bad financial situation. If you are having credit issues, a bank loan is definitely not an option.
- You need fast cash in a competitive market. If there’s a hot property on sale, but you are short on cash, a hard money loan would be perfect.
How does a Hard Money Loan Work? – And How to Improve Your Qualification
Unlike bank loans, hard money loans don’t have strict rules or tedious application processes. Hard money lenders use your property as collateral. That way, they won’t focus on your bank statements or credit history.
So, how do you qualify for a hard money loan?
First, you need to identify the property you want to buy before approaching the lender. It’s good practice to estimate the value of the property before going for the loan. Afterward, you’ll need to make an application and wait for approval.
This usually takes a few days. Once approved, you’ll need to fill in some paperwork. That is, after reviewing all the loans’ terms and conditions. To boost your odds of success, pay attention to the following:
- The down payment. Ensure you can raise the percentage required to secure the loan, often 30% or higher.
- Don’t overvalue. Ensure the loan you are applying for doesn’t exceed the property’s value, as it is.
- Your choice of a private lender. Some lenders are reputed and more professional than others. Choosing the right lender to work with makes the whole exercise easier.
Once your application goes through, you’ll receive the funds, typically within days. The loan repayment terms vary and could run from months to years. A rule of thumb is to choose a shorter repayment period. In other words, you don’t want to pay high interest for years.
How to Choose a Hard Money Loan Lender
Whether or not you’ll qualify for a hard money loan sometimes depends on the lender. Most lenders have strict qualifications, especially when it comes to valuing your property. So, before comparing hard money loan rates, first, check their reputation. A reputed lender has some industry experience and is easier to work with.
Here are the other factors to consider when choosing a hard money lender.
- Speed and simplicity. If you were to take a business or personal loan from a bank, it would take a month or so to process. Your lender should take a week or two, if not days.
- Hard money loan interest rate. Use a hard money loan calculator to compare rates.
- Hard money loan down payment. Anything above 40% could be a bit high.
- The repayment period and total interest to pay over time.
In most cases, you can negotiate your hard money loan monthly payments. But if you fail to honor the agreement, you risk losing your collateral.
When choosing lenders, be sure to talk and network with local real estate agents. Shop around your locality for better deals before moving out of town. The reason is that most lenders choose to operate in areas they understand better.
Hard money loans are an excellent option for people who need quick money for investment purposes. Since the loan is collateral-based, most people with bad credit history can qualify. Similarly, you don’t need a bank statement or proof of income to secure the loan.
That said, the large down payment required makes it uneconomical for some people — especially those investing in a primary residence. Even then, some lenders offer some flexibility. For instance, you can choose to pay interest only during the repayment period.
That means you’ll not have to repay the principal amount during this period. This type of repayment arrangement works well for people waiting to resell the property. It’s also a good strategy if you are taking a short-term loan, especially when you expect a lump sum to help you clear the loan in the future.