In the world of real estate, there are many ways to finance the purchase of a home. While many people use a traditional bank lender, that’s not always possible. When homes need a full renovation or are deemed inhabitable, real estate investors use a hard money lender to finance the purchase of their home.
If you are new to the world of real estate investing, you may not know what a hard money lender is. A hard money company is a specific type of lender that focuses on asset-based financing. These lenders look more toward the value of a home than a person’s credit score or debt to income ratio. Hard money companies tend to be easier to get a loan from. However, they do charge high than normal interest rates, and many of their loans are interest-only loans for a short period of time.
Hard Money Loans
The use of the term hard money accurately describes the loan terms for this type of financing. Hard money lenders typically charge rates between 8 and 15 percent. These high-interest rates are used to help offset the risk for the loan. The type of loan that a hard money company finances is usually for renovation projects. Since these homes cannot be sold on the market for their full market value, they provide more of a risk for the lender.
A hard money loan will typically run between 3 months and 36 months. This gives the real estate investor time to rehab the home and refinance the loan for a long term mortgage or sell it. Many real estate investors enjoy using a hard money loan because it’s so convenient. However, they can be difficult to repay if you are not sure what you’re doing.
Benefits of Using a Hard Money Loan
There are many great benefits of getting hard money loans. It’s important that you understand the benefits of this type of loan so that you can advance your real estate career. The advantages of hard money loans are:
- Quick Approval and Funding
- Very Few Credit Requirements
- Will Fund Inhabitable Homes
- Require a Low Down Payment
- Fund Businesses and Individuals
- Including Rehab Costs
Many hard money companies will include the cost of rehab in the funds that they give you. You’ll need to come up with a budget outline for all the renovations that you’re doing and submit it as part of your loan approval. This is great for real estate investors who need the rehab funds more quickly than they can refinance the home under a traditional 30-year mortgage or sell it on the market.
When it comes to including rehab funds in your loan, they are taken out on a draw basis. Typically, hard money companies will supply you with funds for the purchase of a home upfront. Then, once you complete a section of repairs, they will reimburse you for the repairs through a drawl request. Most lenders require an inspection to ensure that the renovation work was completed before they will authorize a drawl request.
Who Are Hard Money Lenders?
Hard money lenders are comprised of individual people and investors. Most hard money companies are comprised of investors and a hard money lender organizer. The organizer reviews the applications and chooses which investments their investors should give money for.
Most investors behind hard money lending companies have substantial wealth and are looking for ways to enhance their income. This is great news for real estate investors who are looking for a quick source of funding for their next renovation project. If you’re a real estate investor, then you need to be looking into hard money lending for your next project.