Whether you’re a first-time investor, or else a seasoned fixer and flipper of properties, if you’ve never been involved with a hard money loan, then before you begin, you need to find out everything you can about the process from start to finish.
So, in an effort to help you do just that, here’s a comprehensive guide detailing everything that you need to know about hard money loans.
Table of Contents
What Exactly Is A Hard Money Loan?
Hard money loans are the ideal option for people who are looking to invest in real estate and as far as financing options go, a hard money loan is one of the easiest, relatively speaking.
Hard money loans are especially popular with investors who currently have a lower-than-average credit score and are decided not on how creditworthy the borrower is, but on the sturdiness of the investment itself.
Tips for finding the right private hard money lender for real estate for you include:
- Checking out the difference between value and the interest rates.
- Finding out how long it takes for the loan to be approved.
- Looking at recent reviews about the company.
- Making sure any potential lender is fully licensed.
Remember, the more time, effort, and patience you put in when searching for the right lender to suit you and your circumstances, the smoother the process will be, both in the short term and the long term.
How Do Hard Money Loans Compare To Standard Loan Types?
A traditional mortgage loan, for example, is used to purchase a property for the individual or couple to live in, whereas a hard money loan is tailored more to people who are looking to invest in one or more properties to either fix and flip or else use as a rental.
As you might expect, there are many other differences between standard loans and hard money loans, such as the latter usually having a much shorter repayment period and a higher rate of interest.
Other differences between the two include a much faster duration of completion with hard money loans, which also often offer interest-only repayments for the first few months or so.
Alternatives To A Hard Money Loan
Although a hard money loan is incredibly viable, there are other options if you’re looking to finance a property that you’d like to invest in, with one of the most popular being the second mortgage loan, which basically means borrowing from the equity of your current home.
Either a home equity loan, or else a HELOC (Home Equity Line of Credit), would generally have a lower rate of interest, however you’ll be placing your current home against the loan as your main form of collateral.
Another scenario that you may want to consider seller financing, which means that in the context of the purchase of real estate, the seller assumes the position of the lender and although it’s a rare alternative, it’s often the choice for people with bad credit who still want to invest.
Other alternatives include one of the government-backed programs, namely from either the VA (US Department of Veterans Affairs) or the FHA (US Federal Housing Administration).
