You may often hear the term “hard money loan” being tossed around in the real estate world. Today we'll talk about the definition of a hard money loan and tell you how you can use it in circumstances if you are purchasing properties for rehab and flipping.
This type of loan is secured by real property and often times is the last option people look to when they need short term financing. Typically, hard money loans are given by individuals or corporations made up of several investors rather than banks.
Who Can Use a Hard Money Loan?
Anyone! It's as simple as finding someone who will look into your situation and give you the loan. When you join BREIA, you'll have access to our preferred hard money lenders as we have corporate members who specialize in this exact item. Even the most successful real estate investors have utilized hard money loans, and most recently Tarek and Christina of the TV show Flip or Flop used a hard money loan.
At some point, if you are utilizing funds to invest and flip multiple properties, you could come across a great deal, but lack the capital to pull off the job. This is where a hard money loan comes in.
How a Hard Money Loan Works
Again, the loan uses the property as collateral and that is entirely what the loan is based on. This differs from most loans where the loan is based on the credit score and history of the borrower. Banks and other traditional lending operations don't offer hard money loans, but a private company or individual will do this sort of loan despite the risk factor.
Property flippers and renovators are the most common users of hard money loans, although someone buying a home who has an awful credit score can also seek out hard money loans in order to complete the home purchase. The loan is normally a shorter time frame with a higher interest rate, typically you'll find hard money loans being in the one to three year time span.
Cost of a Hard Money Loan
There is no doubt that a hard money loan comes with a higher cost when compared to what a financial institution will offer you. This is because the lender is taking a greater risk.
Pros of a Hard Money Loan
- The approval process is much quicker when compared to a traditional loan through a bank.
- Less decision makers, credit checks, history inquiries.
- Deals are evaluated on a case by case basis.
- You can negotiate with a hard money lender
The investors who make money offering hard money loans also see this as an opportunity to make more money from the property in the case that the borrower can't repay the loan. The property will become their asset at that point should that happen.
Cons of a Hard Money Loan
- Lower loan to value. (Often 50-70%.)
- High interest rates