A hard money loan is a type of private equity funding that doesn’t rely on Fannie Mae or Freddie Mac for approval and instead is funded using your own cash and property as collateral. These loans are beneficial for investors because they provide higher returns than traditional bank financing and can still be used during times of economic uncertainty. But there are a lot of misunderstandings about hard money lenders, so let’s clear things up.
- Hard money lenders charge high-interest rates
- Hard money lenders will only lend to people with bad credit
- You’ll need to put down 25% or more on your investment property
- Hard Money Loans Are a Scam
- Traditional Loans Aren’t as Risky
Myth #1: Hard money lenders charge high-interest rates
Hard money lenders charge higher interest rates than traditional banks, but those rates are still lower than most other types of loans you could get. After all, if you need a loan for your business, chances are it’s because you’re in a tough spot financially—so why wouldn’t you want to find the best deal possible?
Myth 2: Hard money lenders will only lend to people with bad credit
Not true! Hard money lenders are looking for people who have good credit and an investment property that needs financing. If you have good credit and can show that you can handle your finances responsibly, then you’ll be able to get a hard money loan.
Myth 3: You’ll need to put down 25% or more on your investment property
Not true! While some hard money lenders require you to put down 25% or more on your investment property, others only require 10%. The amount of equity required depends on the type of property being purchased and the value.
Myth 4: Hard Money Loans Are a Scam
Hard money loans are a scam. At least, that’s what you probably hear all the time. And maybe it’s true that some lenders can be dishonest. But not all of them. Many hard money lenders in Texas are reputable and experienced professionals who want to ensure that borrowers are getting good value for their investments. They require that the loan amount leverage 30% to 50% of the property because they want to make sure if clients default on those terms, they won’t lose all of their investment money.
Myth 5: Traditional Loans Aren’t as Risky
While there are always things that can go wrong with any loan, and investor mortgages can come with a higher interest rate, they give investors the option of buying multiple properties at once. If you aren’t looking to buy the property, it doesn’t matter whether it’s an investor loan or a traditional loan. But if you are looking to buy and sell quickly, get a conventional loan.
Are you a first-time investor interested in profiting from real estate transactions? If so, it’s important to learn as much as you can about hard money loans. Hard money loans can be an effective tool for financing real estate investments. They are usually only offered to borrowers who can demonstrate a strong capacity to repay the loan based upon their current earning power and ability to liquidate assets quickly if necessary to meet the debt obligation.