Getting a traditional loan to finance a real estate investment purchase is a challenging process. Many banks are hesitant to provide funding for properties in poor condition. Hard money loans provide a solution. Rather than getting money from a traditional bank, you get it from private investors or an investor group. You still have to pay it back (with interest). You also need to pay a one-time processing fee and offer the property as collateral. Like any other form of financing, a hard money loan has is pros and cons. Here’s what you need to know.
They Provide a Solution for New Investors
A hard money loan allows you to secure a property without using a lot of your own funds. Once you become established, you may be able to qualify for other forms of financing (which often come with lower rates)
A Faster Application and Approval Process
Hard money lenders care about the value of the property since it’s what you’ll be using as collateral. The application process is easier than a traditional loan, and you’ll likely receive the money in a few days.
You Establish a Relationship with the Lender
If you create a history of making your loan payments on time, the lender may want to work with you in the future. You may also be able to get better rates.
You May Be Able to Receive 100% Financing
With a hard money loan, you may be able to get 100% financing, rather than needing to put down a decent down payment, which can make things much easier.
Your Property Becomes the Collateral
You do have to provide the property as collateral. If you default on your loan payments, the investors can seize it, leaving you without your investment.
Hard Money Loans are More Expensive
One of the draws of a traditional bank loan is favorable interest rates. Hard money loans have much higher rates, as well as higher origination fees.
You Have Shorter Terms
Most conventional mortgages are 30-year fixed loans. Some are 15-year fixed. A hard money loan doesn’t offer the same terms. Instead, you have to pay them back within a few months to a few years. You may also end up having to pay a higher interest rate after a set amount of time.
Like any other form of financing, hard money loans have their benefits and drawbacks. Consider all of your options and compare the pros and cons to find the best solution.