If you have been investing or thinking about investing in real estate, you probably came across hard money lenders and hard money loans. Some folks think about hard money lenders as loan sharks who work with borrowers in difficult financial situations and charge them exorbitant rates. In actuality, they are confusing them with subprime lenders, a segment of consumer mortgage financing that caters to high-risk borrowers. After the housing crisis of 2009, few subprime lenders are left, and those who are still in operations are tightly regulated.
In contrast, hard money lenders are working with well-to-do or aspiring investors and provide them with funds they need to buy and rehab dilapidated properties. Real estate investing is a challenging domain: prompt access to funds is essential to success. Regular lenders provide scant choices to competing with all-cash buyers. If you are working with a banking institution or a credit union, it might take them 40 days of strenuous scrutiny to make thier underwriting decision. Would your seller wait so long when he or she has an option to sell to an all-cash buyer? Even more significantly, traditional lenders do not often fund residential or commercial projects that entail renovations.
What Is Different About Hard Money Loans?
Hard money loans are a subset of mortgage products that are issued by private lenders – companies or, in many cases, private folks that advance their own funds. Hard money lenders are often called private lenders. Hard money loans are considered business loans and not consumer loans and, because of that, are regulated differently. Generally, hard money lenders are free to take any risk they believe is reasonable and can establish their own special underwriting criteria.
There are three major reasons for private loans’ appeal to real estate investors:
Hard money might be your only source of financing.
Private lenders fund residential or commercial properties conventional lenders won’t touch with a ten-foot pole. These types of buildings typically come with disclosures such as “Sold Strictly As-Is” or “Handyman Special”. Conventional mortgage providers are not set up to handle the risk of rehabs-in-process and would rather not get involved with them. Without hard money lending, many real estate investors with limited savings would have no choice but to twiddle their thumbs on the sidelines.
Hard money offers unparalleled leverage.
Conventional loans are based on your home’s current value. For example, if you are purchasing a home for $100,000, a regular lender might let you borrow 90% of its price or $90,000. In contrast, hard money lenders base their loans on the value your home will have once you finish your rehab. “The difference between the current value of the property and it’s future after repair value is what makes private lending tick,” – says Kyle Sennott, the Managing Partner in New Funding Resources, a hard money lender in Maryland. “We base our loans on the future value of the property and are able to let our investors borrower more than they ever could with a traditional-style lender,” – adds Kyle.
Hard money loans can be closed within a week vs months.
Most of hard money lenders utilize easy underwriting requirements and concentrate largely on the investor’s capacity to earn money by flipping a property. This type of lending is offer referred to as collateral-based or asset-based lending. It means that your property’s profit potential is more important than your current income or credit score.
Conclusion: If you a novice investor, you might not have enough cash to purchase your first investment property outright. If you are an experienced investor, sooner or later, you will have your own funds tied-up in existing projects and might need a cash infusion to pursue additional deals. Without an ability to borrow money fast and on terms that make sense, both types of investors would be out of luck. Hard money lenders offer them a unique opportunity to grow and expand their real estate investment businesses.