Hard money loans are one of the most common ways real estate investors fund their deals. Private lenders provide short-term financing for real estate transactions, often with a higher interest rate than conventional bank loans. Hard money lenders are willing to take more risk because they know that there is an asset securing the loan – property. In this article, we’ll show you how to get a hard money loan, step-by-step.
What Is A Hard Money Loan?
A hard money loan is a type of short-term financing used by real estate investors to purchase and rehab properties. Hard money loans are typically provided by private investors or hard money lending companies. They are also usually more expensive than traditional bank loans, but they are often the only financing option available for real estate investors looking to buy distressed properties.
How Do Hard Money Loans Work?
Hard money loans are secured by the property being purchased. The lender will usually lend a percentage of the purchase price, and the borrower will be responsible for rehabbing the property and then selling it for a profit.
Hard money loans typically have a shorter loan term than traditional bank loans, so the borrower must be prepared to sell the property quickly.
What Are Hard Money Loans Used For?
Hard money loans are most commonly used for the following purposes:
- Flipping a house: Hard money loans are often used by real estate investors to finance the purchase and renovation of distressed properties.
- To rehab properties: Hard money loans can also be used to finance the renovation of a property.
- To finance short-term real estate investments
How Long Does It Take To Get A Hard Money Loan?
The timeline for getting a hard money loan depends on the lender. Some lenders can provide funding in as little as 24 hours, while others may take a week or longer. If you need the loan quickly, be sure to ask the lender about their timeline for funding.
Hard money loans typically last for 6 to 12 months, but some lenders may offer longer terms.
Traditional Loans
Traditional loans are different from hard money loans in a few key ways:
- Hard money loans are typically provided by private investors or hard money lending companies, while traditional loans are provided by banks.
- They are usually more expensive than traditional loans.
- Hard money loans are typically for a shorter loan term than traditional loans.
Most people are familiar with traditional loans because they are the most common type of loan. Traditional loans are provided by banks and other financial institutions. They typically have lower interest rates than hard money loans, but they also usually require a higher credit score and down payment.
The Benefits Of Hard Money Loans
Hard money loans are a good option for real estate investors who cannot qualify for traditional bank financing. They are also a good option for investors who are looking to buy distressed properties and need the flexibility to rehab them as they see fit.
Some of the main benefits of hard money loans are:
- They are easier to qualify for than traditional bank loans.
- You can use Hard money loans to purchase and rehab distressed properties.
- They are a good option for investors who cannot qualify for traditional bank financing.
The Risks of Hard Money Loans
Just because hard money loans can be a smart option for some investors doesn’t mean that’s the case for everyone. Hard money loans also come with some risks that you should be aware of before you apply:
- They typically have a higher interest rate than traditional bank loans.
- Hard money loans are usually for a shorter loan term than traditional loans, so you will likely need to sell the property quickly.
- If you default on a hard money loan, the lender can foreclose on the property.
How To Get A Hard Money Loan
The first step to getting a hard money loan is to find a hard money lender. There are many hard money lenders out there, so it’s important to shop around and compare rates. Once you’ve found a few potential lenders, you’ll need to fill out an application. We’ll get into that next.
How To Find A Good Lender
When you’re looking for a hard money lender, there are a few things you’ll want to keep in mind:
- Look for a lender with competitive rates. You can find different rates by shopping around and comparing offers from multiple lenders.
- Make sure they are a licensed and accredited lender. You can check with your state’s banking regulator to make sure the lender is licensed in your state.
- Check for reviews and testimonials. You can read online reviews or ask other investors for recommendations.
The Application Process For Hard Money Loans
The application process for hard money loans is generally much easier than the process for conventional loans. Hard money lenders care more about the value of the property than they are in the borrower’s credit history.
When considering a hard money loan, one of the main things that lenders look at is the value ratio. This is the ratio of the property’s purchase price to its current value. Most lenders prefer a value ratio of 80% or higher. So if the property’s current value is $100,000, the purchase price would likely need to be at least $80,000.
Some other things that hard money lenders will look at include:
- The property’s location. This is important because it will affect the property’s value and how easy it will be to sell.
- The property’s condition. The lender will want to know if the property needs any repairs or renovations.
- The borrower’s experience. Lenders will want to know if you have experience with rehabbing properties.
- The type of property. This is important because some properties are more difficult to sell than others.
- The loan-to-value ratio. This is the ratio of the loan amount to the property’s value. Most lenders prefer a loan-to-value ratio of 70% or lower.
To apply for a hard money loan, you’ll need to fill out an application and provide some documentation, such as proof of income and a list of properties you’ve owned in the past. Once you’ve been approved for a loan, you’ll need to put down a deposit and sign a contract.
Hard money loans are typically much easier to qualify for than traditional bank loans, making them a good option for real estate investors who cannot qualify for traditional financing.
Documents You’ll Need To Provide When Applying For A Hard Money Loan
When you apply for a hard money loan, you’ll need to provide some documentation to the lender. This documentation will typically include:
- Proof of income
- A list of properties you’ve owned in the past
- The contract for the property you’re looking to purchase
- An appraisal of the property
- A down payment
Hard Money Loan Rates And Terms
Hard money loan rates and terms vary from lender to lender. As we mentioned, private lenders are typically more expensive than traditional banks, but they offer several advantages, such as the ability to purchase and rehab distressed properties.
When you’re shopping for a hard money loan, be sure to compare rates and terms from multiple lenders. Hard money loans are typically bridge loans, so it’s important to find a lender who offers competitive rates and terms.
According to Freddie Mac, as of Fall 2021, the average rate of a 30-year mortgage is 3.01%. Hard money loans will typically be higher than this, but the terms are usually shorter. For example, a hard money loan for a 30-year mortgage might have an interest rate of 7.5% – 15% instead.
Hard Money Loan Approval Process
The approval process for hard money loans is typically much easier than the process for traditional bank loans. Unlike traditional lenders, private lenders care more about the value of the property you’re planning to purchase than they are in the borrower’s credit history.
However, it is critical to have a good credit score regardless of which type of loan you’re applying for. Having good credit is important for many reasons. A good credit score can help you get approved for a mortgage, a car loan, and other types of financing. It can also help you get a lower interest rate on your loans.
If you have poor credit, you may have to pay higher interest rates and may not be able to get approved for certain types of loans. To raise your credit score, you can do things like paying your bills on time, maintaining a good credit history, and using a credit monitoring service.
A good credit score is generally a score of 700 or higher. If your credit score is below 700, you may still be able to get a hard money loan, but you may have to pay a higher interest rate.
Key Takeaway
Hard money loans are a good option for real estate investors who cannot qualify for traditional bank financing. You can use these loans to purchase and rehab distressed properties, making them an attractive alternative to the more restrictive traditional loan process. If you’re shopping around for hard money lenders with competitive rates and terms, remember that they often have higher interest rates than their traditional counterparts.
When you’re ready to apply for a hard money loan, be sure to have your documentation in order, including proof of income, a list of properties you’ve owned in the past, and the contract for the property you’re looking to purchase. Hard money loans typically require a smaller down payment than traditional bank loans. Once you’ve been approved for a loan, you’ll need to put down a deposit and sign a contract. Thanks for reading!