Since the COVID-10 pandemic, there has been an increase in the number of people who take out loans for various reasons, such as financial uncertainty, increased investment opportunities, and government incentives. Just in the US, the number of borrower accounts is expected to reach 269 million in 2024.
While traditional lenders may have stringent requirements and lengthy approval processes, hard money loans offer an alternative funding source if you seek quick capital access. In this guide, we’ll look into the intricacies of hard money loans, exploring how they work and when they might be the right choice for your investment endeavors.
What Are Hard Money Loans?
Hard money loans are short-term, asset-based loans with real property or real estate securing them. Unlike traditional lenders who evaluate you based on creditworthiness and income, hard loan lenders take your property as collateral. Instead of banks, private investors or companies specializing in real estate financing, like Pacific Northwest Capital Partners, typically issue these loans.
Since they take real estate as collateral, their funding time is usually shorter than that of traditional loans. However, you’re more free to negotiate the terms of your loan and customize loan structures to suit your specific needs, as the rules are more flexible than bank-issued loans.
With expedited approval processes and fast funding timelines, hard money loans enable you to quickly capitalize on time-sensitive investment opportunities and secure properties. The convenience and accessibility of hard money loans come at a price, however. These loans usually have short repayment terms and higher interest rates than bank loans. On the positive side, this can pressure you to execute your investment strategies quickly and efficiently.
How Do Hard Money Loans Work?
Hard money lenders focus on the value of the property rather than your financial history. If you have less-than-perfect credit or unconventional income sources, this type of loan might suit you. Here, lenders assess the value of the property you offer as collateral, considering its current condition, location, market value, and potential for appreciation. Once they have ensured your property’s prospects and legal standing, you’ll proceed to draw up the loan repayment terms.
While the payment schedule usually lasts a few months, you can extend it to over a year based on your lender’s flexibility. The loan amount for a hard money loan is typically based on the property’s value, known as the loan-to-value (LTV) ratio. Lenders may offer loans ranging from 60% to 80% of the property’s appraised value.
Since the entire process depends on your property, not your finances, your lender can make funding decisions faster. That means you won’t have to wait for clearances before you receive the loan, unlike traditional banks.
When Should You Take Out a Hard Money Loan?
Hard money loans can be appropriate in various situations where traditional financing may not be available or feasible. You can borrow money for real estate fix-and-flip projects where you purchase damaged properties, renovate them, and then sell them for a profit.
You can also take out a hard money loan if you’re stuck in a situation that needs bridge financing. For instance, you may require interim financing to bridge the gap between purchasing a new property and selling an existing one. These loans provide short-term funding to cover expenses such as down payments, closing, and renovation costs until you can secure permanent financing or sell the existing property.
Endnote
Navigating the world of real estate loans requires careful research, strategic planning, and a thorough understanding of available options. Hard money loans offer real estate investors a valuable tool for accessing quick and flexible financing solutions. Make sure you have consulted with your financial advisor or an expert before deciding on the kind of loan that suits your needs.