Hard money is an alternative way to finance your real estate investments. When you need a quick loan to buy distressed property, or you need funds to fix and flip a property, or when you don’t meet traditional lenders credit or income criteria, then a hard money loan could be just the type of loan for you.
Hard money loans are a fast and straightforward way to fund your real estate investments without all the red tape. Hard money loans are funded by private investors who lend money as long as you demonstrate that you can repay it.
The loan is more based on the property and your experience than credit scores. However most hard money lenders will still be interested in viewing your credit scores as well as income available to repay the borrowed money.
However, the qualifications are much easier than a traditional bank mortgage. For many real estate investors who need a quick loan, this approach provides a much better alternative to traditional lending that drags borrowers through a painfully slow process.
When does hard money make sense?
Hard money loans are often a great alternative to traditional lenders for quick short-term borrowing. Below are some of the circumstances when hard money might make the most sense:
- You are a fix-and-flip investor who needs funds to purchase the property as well as funds to rehab the property. Once the property is fixed up and back to market value then you will sell the property and repay the loan, oftentimes within the duration of a year.
- Your unable to meet the strict requirements required by banks or other traditional lenders to obtain funding for your investment property.
- You are unable to access private financing from family and friends.
How do hard money loans work?
Just like conventional bank loans, hard money loans involve an underwriting process. But this process is much quicker. Hard money lenders are more interested in the collateral (the value of the property you wish to flip) and your experience. This essentially explains why most applications are approved in as little as 24 hours.
Once you submit your application, your selected hard money lender will perform an appraisal of the property to make sure it meets their criteria. Once this is confirmed, you’ll need to provide the necessary documentation on the property before your loan can be approved.
Note: hard money loans are typically short-term loans lasting anywhere from a year to five years. The goal is to get in and out of the property. Most real estate investors use hard money because they need access to quick cash to secure a below market property.
Hard money helps you make aggressive offers and close fast. Also, when selecting a hard money lender, do your due diligence to make sure you are working with a reputable lender.
Hard money loans types
The most common types of hard money loans include:
- Fix and Flip Loans– Fix and Flip loans provide funds for you to purchase a distressed property, fix it up and then sell it for a profit.
- Equity loans – Pull cash out of the equity of your existing free and clear investment property.
- Bridge loans – this type of hard money loans is a short-term loan that is used until a person or company secures permanent financing. It usually bridges the gap between getting a new loan or purchasing an investment and then paying off that existing purchase loan with securing a new permanent or longer-term loan. Its typically a quick loan.
- New Construction Loans – Build your new investment property with a construction loan.
What are hard money loan requirements?
The kind of underwriting process you go through typically varies from one lender to another. In most cases though, the following requirements are necessary:
- Your location – hard money lenders tend to operate locally and will only approve loans for individuals from their geographic region.
- Your experience level – the kind of experience you have flipping homes may influence your borrowing rate.
- Property type and documentation – your hard money lender will gather information regarding the type of property you are purchasing and will may request documentation such as a executed sales agreement, appraisal, and borrower application.
Pros and cons of hard money loans
Hard money loans have become very popular for real estate investors. Here are some of the advantages and disadvantages of hard money loans.
- Faster closing – hard money lenders are typically mostly interested in the collateral. For this reason, hard money applications are closed much faster compared to traditional bank loans. And once you create a relationship with a hard money lender, the process will become even easier and faster – giving you the potential to close deals that other borrowers can’t.
- Flexibility – this is another major advantage of hard money loans because the underwriting process is less stringent. In fact, most hard money lenders evaluate each deal individually and may give you the options to tweak the repayment schedule. Traditional lenders are typically tied to strict corporate policies that limit flexibility.
- Rehab funds– hard money lenders will give you the amount you need to purchase the property and also fix the property up to market value. Most traditional banks do not lend on property that needs a lot of work. Especially for investment properties. The risk is to high. This is where a hard money loan makes the most sense
Just like other types of loans, hard money is not perfect. The major drawback to hard money loans is that they can be expensive. Especially when you compare them to a traditional bank loan.
However, hard money lenders take much more risk than other loans types and fund deals you may not be able to get approved for anywhere else. Its very important that the overall numbers make sense to the hard money lender and also the real estate investor that is getting the loan.
How to find a hard money lender?
Atlanta Private Lending is a local direct hard money lender in Atlanta, GA. Atlanta’s leading hard money lender providing hard money loans to professional real estate investors.
APL focuses on funding non-owner occupied property for fix and flip, new construction, rental properties and commercial properties for investment purposes.
Started in 2008, specializing in renovation lending for real estate investors, new construction loans, rental property “buy and hold”, cash out “equity loans” and true hard money lending.
Offering niche programs filling a void the local community banks have left by offering niche lending programs to real estate investors.