Real estate is one of the most expensive investments you can make. This is why most people borrow money to buy property. There are different financing options that real estate investors can choose based on their financial status and financing needs. Mortgages and hard money financing are two of the best real estate financing options.
Mortgages are usually taken on by private homebuyers to pay for a home they want to live in. To qualify for a mortgage, one must have a few thousand dollars saved to make a down payment. Banks and financial institutions also check the borrower’s credit history to ensure that they are a safe lending bet.
Hard money financing is different. These are loans taken by real estate investors to finance fix and flip deals. But homeowners can also enjoy the benefits that hard money financing offers. Keep reading to learn what hard money financing is and the 11 key benefits of this financing option.
What Is Hard Money Financing?
Hard money financing refers to a short-term real estate loan secured by the value of a property. Hard money lenders don’t care about a borrower’s creditworthiness as long as they have a property whose value exceeds the loan amount. An investor would approach the lender to finance the purchase and repair of a “fixer-upper” property.
The expectation is that the final sale value of the property would make enough of a profit to pay off the loan. A hard finance lender would typically ask for the property evaluation. They also loan to value estimate and the borrowers plan to renovate or build the property.
Because the loan is secured by the property’s value, lenders don’t place a lot of weight on a borrower’s credit history. They would prefer to lend to someone that has a history of successful property flips or a larger down payment. Successful real estate investors carry less risk as they know their way around the property market.
Also, if a property deal doesn’t go as planned, the lender is more likely to recoup their money if the borrower had made a large down payment. The sale of the property would cover the balance of the loan amount. This is why many hard money lenders need a minimum down payment of 25-35% of the property sale price.
There are some 100% hard money financing that can lend you the full purchase value of the property with no down payment requirements. These “no money down” loans take into account the profitability of a real estate project. Most hard money finance loans have a payment term of between 6 to 18 months.
Because of their higher risk and shorter payment period, interest rates are often higher than mortgage interest rates. Most hard finance loans have an interest rate of 10% or higher, depending on your risk profile.
Hard money loans also have origination fees called “points”. This is a set percentage of a loan that the lenders charge to process, fund and service a hard money loan. These fees range from between 2-5% of the loan amount. So, if you borrow $200,000 on a loan that charges two points you will need to pay an extra $4000 on top of your down payment.
Benefits of Hard Money Financing
As you can see, hard money financing could be very beneficial to real estate investors. Below are 11 specific reasons why you should consider a hard loan for your next investment property.
1. Easy Application Process
Applying for a mortgage can be a long and tedious process. Banks and credit unions give you many forms to fill with lots of complicated questions. You also have to dig deep into your files to find a long list of supporting paperwork for your mortgage application.
Some people even shy away from the application process once they see the requirements. Others hire professionals to help them complete the paperwork and assemble any supporting documentation. Luckily, the application process for hard money loans is straightforward.
The lenders are mainly interested in property evaluations and renovation plans. They may also ask you to provide a history of any previous investments that you have done. Many people that have received a hard money loan refuse to apply for any other type of loan since hard loans are much easier to apply for.
2. Get Funds Faster
Investment properties are often in high demand. A property whose price is below market value will attract many buyers willing to pay cash. To compete with other buyers, you’ll also need to have quick access to cash.
For such deals, hard money financing may be the best way to go. Lenders in the hard finance industry don’t need to check your creditworthiness. So, they approve loans and release money faster than traditional lenders.
The underwriting investigations for bank loans can take several weeks. On average it takes about a month to get mortgage funds from banks and credit unions. If you apply for a hard money loan you could get the funds in a few days.
3. Less Risk
When you use 100% hard money financing to fund your real estate investment, most of the risk lies with the lender. Hard finance lenders are willing to put their money on the estimated value of a property and your ability to complete the renovations. Many times, they evaluate the risks correctly and make a profit out of the loan.
But sometimes unexpected events occur, and the property value tanks. Maybe the real estate market crashed or the property was overvalued. If the property doesn’t fetch back the required profits or renovations are not completed as planned, the lender stands to lose most.
4. Less Savings Needed
Hard money financing offers a great opportunity for new investors to get into the real estate market. Traditional mortgage lenders need a down payment of about 20% of the loan amount. New real estate investors may not have $30,000 to $50,000 in savings to pay for a down payment on a property.
Sometimes an investor wants to buy several properties within a short time. In these cases, they won’t have enough capital to make a down payment on each property. “No money down” loans allow you to get your foot into the property market without any savings. You may only have to worry about the points or origination fees which are often less than $10,000.
Once you get a hard money loan and complete a project you can then start saving money to finance future deals. The profits from your first property flip would then get you the capital for future projects.
5. Pursue Several Deals at Once
Another benefit of hard money financing is that it allows you to pursue many real estate investments at once. If you use traditional mortgage financing to fund your investment properties, you’ll need to make a hefty down payment on each property. Most people do not have this kind of capital, so they invest in one property at a time.
But with 100% hard money financing you can buy several properties and renovate them at the same time. As long as you can manage all the deals on your plate, there is potential to make a lot of money over a short period. Another great benefit is that you can pull money from one project to fund another project.
Let’s say you are renovating two properties at the same time and have surplus funds on one project. You can draw some money from the surplus to complete works on the second property.
6. Own a Property Even With Bad Credit
People with bad credit have limited financing choices. If you have a bad or limited credit history, you will not have access to a traditional mortgage. This also goes for anyone that doesn’t have a regular source of income.
For instance, if you are a self-employed person or a writer or artist. You may get a large windfall of money and then go for a year or more without an income. Banks and credit unions would consider you too risky to lend money to.
But if you have significant assets and a high income you will be an attractive client for hard money lenders. Once you get the hard finance loan and own the property, you may be able to transition to a regular mortgage after the loan term ends.
7. Overcome Bankruptcy Restrictions
If you have ever filed for bankruptcy you know how difficult financial planning can be. Bankruptcy closes you out of many processes that other people find easy.
For instance, it can be hard for you to rent a home or even get certain jobs. Hard money financing allows those with a bankruptcy filing to start a real estate business or own their own property.
8. Get Real Estate Investment Advice
Another benefit of hard money financing is that many lenders in this industry act as your business partner. Many of the lenders were former real estate investors and they often give business advice to help your investments succeed.
After all, their money is tied to the success of your project. The more successful you are, the more business you can give them.
9. Enjoy Lenient Terms
Hard money lenders are often more lenient with their payment terms and processes than traditional mortgage providers. For instance, if you are unable to meet a payment you could approach the lender for a new payment plan. You’ll find that hard money lenders want you to be transparent about your project and inform them of any issues you are facing.
For instance, if there are delays in supplies, they may be able to offer you solutions on how to get alternative suppliers. Or if you need to refinance their loan, they may agree to draw up a new plan according to your project needs. These lenders prefer knowing about the progress of your project to getting unwanted surprises when it’s too late.
Traditional lenders are often very rigid with their terms and conditions. Any deviation from the agreement often leads to hefty fees and penalties. Many people even lose their properties.
10. Loans That Are Tailored for You
Another benefit of hard money loans is that lenders can tailor them to suit your specific needs. Different investors have different capital requirements. Some have enough money saved to make a huge down payment and others are starting with zero capital.
One property may have a high loan to value ratio while another may have a low one. Some projects end in 6 months while others will take 2 years. Traditional mortgage brokers are tied to certain terms and conditions that have been thoroughly investigated by underwriters.
These brokers rarely deviate from these terms. But a hard lender can assess each loan application and adjust interest rates, points, and term lengths as needed. This ensures that you get the best possible deal for each loan.
11. Ability to Negotiate on Properties
Hard money loans give investors quick access to cash. This makes it easy for them to negotiate on property rates with sellers. If a property is on the market and many buyers are bidding for it, the seller often goes with the person that can pay immediately. Knowing that you can get funds in 24-48 hours gives you a stronger negotiating position over other buyers.
Leverage the Benefits of Hard Money Financing
Traditional mortgages take weeks to process and are only accessible to people with a great credit history. Hard money financing makes it easy for property investors to get cash fast, even with a bad credit history.
If you’re new to the property market or pursuing several deals at once, hard financing could be the best option for you. Hard money financing also works great for high-earning people whose income is sporadic to get on the property ladder.
Does all the above sound interesting to you? Then apply today for a hard finance loan to fund your next property investment. For more information on hard money financing, read the rest of our blog.