Hard money loans are, after all, a real estate investor’s best friend; they are the quickest path to securing a deal. Nonetheless, hard money lending can get complicated quickly, so you need to realize what you are getting into before making any decisions for yourself.
When exploring real estate hard money lending, you need to comprehend several questions: What are the pros and cons of such a strategy? When should you use private financing for real estate? Where can you find hard money lenders for real estate? The more you know about hard money, for that matter, the better. This guide should serve to lay a solid foundation for everything you need to know about one of today’s greatest sources of capital.
What Is Hard Money Lending?
Many investors looking for alternative financing that doesn’t involve their local bank may have heard the term “hard money.” They may have even asked themselves a simple follow-up question: what is hard money lending?
Hard money lending is a short-term loan obtained from private investors or individuals at terms that may be more strict than a traditional loan. Though the terms of this creative financing option may be stricter, this form of private financing for real estate generally has more lenient criteria.
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Hard Money Lending FAQs
Hard money lending is another way an investor can finance their real estate projects outside of the traditional mortgage means. This is a short-term loan secured from private investors or individuals instead of other traditional institutions like banks or credit unions.
Hard money lending is often used by investors who aim to improve or renovate a property and sell it. Given that you can usually get a loan in a matter of days (as opposed to weeks from banks), this is a fine choice for house flippers and real take a look at this website estate developers. This is also an option for investors who only need to do quick fixes to raise a property’s value, then secure another loan based on the new value to pay off the hard money lender.
The main difference between hard money lending and other types of loans is that this type of financing does not focus on your credit history or income as collateral. Instead, lenders will see the property’s value as the determining factor, emphasizing its after-repair value (ARV). ARV is the worth of the property once your renovations are done.
Hard money lenders do not invest in primary residences. Owner-occupied residential properties are subject to many rules and regulations, thereby increasing the risk for lenders.
Hard money lenders do not sell loans to Freddie Mac or Fannie Mae. More often than not, lenders use their own money or raise it from a pool of investors. The loan amount is based on their property specialization (if there are any) and the risks they are comfortable taking.
Hard money loans are short term. You will not have the luxury of 15 to 30 years to repay your loans. Hard money loans are typically needing to be repaid anywhere between 6 to 18 months.
Hard money lenders have their own lending criteria. A private lender, for example, could be your friend, family, or business associate. As such, they may not have any preset criteria before lending you money, giving you more flexibility in negotiating terms. Hard money lenders, on the other hand, come with a specific set of upfront points, interest rates, and defined durations.