Are you having trouble financing a real estate property through a traditional financial institution? Whether the property needs too much work for the bank, or your credit isn't high enough to get you preapproved for the property, it can seem like you are backed into a corner.
The good news is that there are other options that infuse flexibility throughout the financing process, one of which is a hard money loan. Understanding the basics, general process, and uses can help you determine if a hard money loan is the solution for your next real estate purchase.
What is a Hard Money Loan?
A hard money loan is a short-term financing solution offered by private lenders. These loans use the property being purchased as collateral, meaning you have more flexibility when it comes to repayment terms, loan amounts, turnaround times, and credit scores.
Hard money loans aren't meant to be long-term financing solutions, with the general term length being under 12 months. The underlying purpose of a hard money loan is to give you the funds needed to purchase a piece of property or equipment quickly and then refinance down the road.
How Does a Hard Money Loan Work?
Each hard money lender will have different criteria that they use to finance the purchase. However, there must be something purchased with value that can be used as collateral. This is commonly the piece of equipment or real estate property being purchased.
If you are purchasing a rehab property, you should have tangible information on the remodel costs and what you expect the property to be worth after repairs are done. This is why it's helpful to have a property picked out before you go through the qualification process with a hard money lender.
Once your hard money lender has all the necessary information, they will begin processing your application. This is a quick process, only lasting a few days. After you've secured financing, you should work out long-term financing or start rehabbing the property.
When Should You Use a Hard Money Loan?
Hard money loans can be used for a variety of purposes, from purchasing a new piece of equipment for your business to flipping a real estate property. Here are some other common uses:
- Fixer Upper Financing - Sometimes you need extra cash to remodel a property. Hard money loans can lend above the purchase price of the property, allowing you to pull out future equity. Once the property appraises out, you can repay the hard money loan.
- Quick Purchases - The real estate market is fast-moving, meaning you might not want to wait for traditional financing to come through. A hard money loan can be used to finance the property while you work out a long-term solution.
- You Don't Qualify for Other Financing - Traditional lenders can be very specific in their evaluation criteria. This can result in not qualifying for the property due to low credit scores, small down payments, or unsafe property. Hard money lenders don't follow this same criteria, giving you more flexibility.
Taking out a hard money loan might not be the best option if you are looking for long-term financing, want a lower interest rate, or can wait weeks to close.
Hard money loans are a great solution for investors looking to purchase non-traditional property. Working with the right lender can make all the difference. Our team at Easy Financing can be your trusted ally throughout the hard money loan process. Reach out today to go over the next steps.