As a real estate investor, finding the right financing partner can be a challenge. Deals are often won or lost based solely on the ability to have quick access to the necessary capital. For the investor looking to scale their business, it’s important to work with a lender who can quickly and efficiently provide financing. This becomes even more imperative in competitive markets, much like what we see today around the country, with dozens of bidders competing for a single property.
With all of that in mind, what financing options are available? Many real estate investors may look for financing with a bank or traditional lender, but the process is often too slow with mountains of paperwork and strict underwriting guidelines. They may look to a friend or family member for a personal loan, but that may not always be the most reliable source for financing. A third option is a hard money loan. A hard money loan is an excellent form of alternative financing for real estate investors looking to acquire financing beyond the usual means of obtaining a traditional loan.
In this article we’ll explain what a hard money loan is, how it works, who can offer hard money loans, what to look for in hard money lenders and much more!
What Is A Hard Money Loan?
The first step to understanding hard money loans is to know exactly what a hard money loan is. A hard money loan is a short-term loan provided for the purchase or refinance of non-owner occupied properties. Loans typically last on an average of 12 months. The loans are often underwritten based on the property’s value and the assets of the borrower and not just the borrower’s credit. A hard money loan requires less paperwork and less stringent underwriting, which allows for closings to occur much more quickly than traditional mortgages.
How Does a Hard Money Loan Work?
Applying for a hard money loan is fairly simple. Investors with potential real estate transactions can quickly apply online or work with a sales consultant who will help process their application.
The hard money loan process can be broken down into six steps:
1. Application
2. Underwriting
3. Processing
4. Funding
5. Servicing
6. Payoff
Once a hard money loan is funded, the process remains fairly straightforward and similar to traditional mortgages with monthly payments, construction draw requests and reimbursements for properties in need of rehab. Once a project is completed, a payoff letter can be requested and the investor will satisfy the loan and keep the remaining proceeds as profit.
Hard Money vs. Traditional Financing
How are hard money loans different from traditional loans?
1. There is far less paperwork with hard money loans
2. Interest rates are slightly higher
3. Hard money loans offer higher leverage
4. Hard money loans can be funded in as little as 48 hours, traditional lenders can take up to a month
What Does This Mean for Investors?
When weighing their options, investors will have to decide what type of financing works best for them. Hard money loans offer the most straightforward process and give investors the flexibility they need to fund their deals with higher leverage and a faster closing time. However, lower interest rates from banks or other traditional financing may make more sense depending on the investors strategy.
Hard Money Lenders: What You Need to Know
A hard money lender is a company that specializes in financing hard money loans and making profit off of risk. Similar to private lenders, hard money lenders have the cash on hand to fund the purchase or refinance of a real property at any time.
What Types of Real Estate Does a Hard Money Lender Finance?
Hard money lenders finance non-owner occupied single-family or multifamily properties being purchased for business purposes. The hard money loans can be for a variety of property types such as fix and flip properties in need of rehab, cash-flowing rental homes, 5+ unit apartment buildings, and in special cases, commercial real estate may also qualify for a hard money loan.
Many hard money lenders offer more flexibility with their product types than traditional lenders or private investors and can create custom loan structures to fit the needs of a particular loan scenario.
Loan Funding Timeline
The attraction to hard money loans comes from the speed of the underwriting process and the short timeframe that it takes to acquire funding. What does that timeline look like and how does it happen so quickly? Because the underwriting process is primarily focused on the properties themselves, funds can be dispersed in as little as 48 hours depending on the deal structure. Once the property is approved and the term sheet is sent and signed by the investor, the remaining process takes very little time and the money is quickly wired to allow the investor to finalize the purchase of the property.
Interest Rates and Fees On a Hard Money Loan
Using hard money loans offer many benefits. One of the benefits as we’ve mentioned previously is the speed that a hard money loan can be closed and funded. Another area that differs from a traditional loan are the interest rates and fees. The average interest rate on hard money loans is typically around 7-10% depending on a variety of factors such as experience. As noted earlier, hard money loan rates are slightly higher than (but still competitive with) what traditional lenders offer.
Fees paid by the investor typically include an origination fee, processing/document fee, down payment and closing costs. These can also vary based on the loan amount, investor experience, etc.
Hard Money Lenders for First-Time Investors
Working with a hard money lender for may seem overwhelming for a first-time investor. The process for borrowing money, however, is usually very simple and straightforward. A first-time investor should understand the required funds needed to make a down payment as well as the other fees associated with closing the loan. Research is key when finding the right financing partner and understanding which lender offers the best combination or products, speed, flexibility and customer service.
Wrap Up
In this article, we’ve covered what is hard money, how does it work, who are hard money lenders and much more.
For first-time investors or experienced professionals, understanding the available financing options is crucial for getting started in real estate investing or looking to grow a real estate business. Hard money loans offer the perfect combination of flexibility, fast closings and competitive interest rates.
About Easy Street Capital
Easy Street Capital is a relationship-based investment real estate lender with loan programs for every borrower. Regardless of experience or credit we are able to finance your next investment property. Whether you are buying a property to fix up, building new construction, or generating cash flow from rental units Easy Street Capital has the solution.
As a fully discretionary lender we have the ability to customize a loan specifically to meet your individual needs. We look forward to assisting you with your next project.
Contact us today to get started on your next real estate project!
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