If you’re looking to buy a property that you plan on rehabbing or converting into a rental, your options may be fairly limited. If your credit score isn’t great or you need cash quickly, you might be out of luck when it comes to traditional financing. In these situations, many borrowers turn to hard money loans—quick loans made by private investors and not secured by properties.
Hard Money Loan
Don’t confuse a hard money loan with a traditional mortgage. While both lend you money to buy a home and charge interest on the loan, their form and function are very different. A hard money loan is typically offered by a private individual or company, using the property you’re buying as collateral for the loan. Unlike traditional mortgages, where you agree on an interest rate, term, and repayment schedule before applying for the loan, hard money loans typically come with “negotiable” terms based on how much cash the lender wants to make on the deal and what you need as a buyer.
You might end up paying more in points (like an upfront fee) or interest—or less—depending on what your lender requires to participate in the loan. Regardless of your financial situation or the credit score associated with your home purchase, you can get a hard money loan. Hard money loans are intended for short-term use, but some investors will offer them longer-term loans—usually five to 10 years—if you seek them out.
Benefits of Hard Money Loans
Hard money loans provide several benefits for borrowers. These include:
- Low Credit Score Requirements
- Quick Approvals and Funding
- No Collateral Necessary
Low Credit Score Requirements:
Unlike traditional lenders, hard money lenders are not bound by the same regulations as banks. This means they can be more flexible with credit score requirements and may be willing to approve someone who has a less-than-perfect credit score.
Quick Approvals and Funding:
A hard money loan can be approved in just a few hours, and the funds are usually available within a day or two of approval. This means you don’t have to wait for weeks on end to know whether or not your loan will be approved.
No Collateral Necessary :
With hard money loans from private lenders, there is no need to secure the loan with collateral. You also do not have to provide a detailed business plan or demonstrate other forms of financial stability to prove that you can repay the debt.
Risks of Hard Money Loans
While hard money loans have plenty of benefits, a borrower must also consider the risks. Among them are:
- Higher Interest Rates
- Limited Availability
- Short Repayment Time
- Limited Funding
Higher Interest Rates:
Hard money loans often come with higher interest rates than conventional bank loans because fast-selling assets secure them, and the lender is at higher risk.
Hard money loans are only available to borrowers looking to buy properties that are likely to sell quickly. That makes them difficult to buy and sell in a timely manner, especially for borrowers who can’t make large down payments.
Short Repayment Time:
A typical loan term for a hard money loan is twelve months or less, which means you have less time to sell or refinance your property before you must pay off the loan.
Lenders for hard money loans typically limit their funding to around 75% of the total value of the property, meaning the borrower must put down at least 25% of the purchase price as a deposit.