Investing in real estate can be a great way to make extra money. However, obtaining a conventional loan for a real estate investment can be tricky. Apart from a long turnaround, the application process can be draining. Nonetheless, real estate investors have found relief in hard money loans.
But before we delve deeper into the subject, let us handle the basics first.
What is a hard money loan?
Simply said, a hard money loan is a short-term credit backed by real estate. It is sometimes referred to as a bridge loan. Hard money loans can be used to acquire single-family residential, multi-family residential, industrial, and commercial property. Also, they are ideal for real estate investors interested buying or developing land. Note that mainstream financial institutions (FI) such as credit unions and banks do not offer hard money loan services. Hard money loans are funded by private investors.
The standard repayment term is usually 12 months. However, it can be extended to a maximum of 5 years. The repayment is typically monthly, where you can pay interest only or interest and some principal before paying the final balloon payment at the end of the facility.
Traditional banks will look at your creditworthiness before they can process your request. On the other hand, hard money lenders look at the LTV, short for loan to value ratio. The Loan to Value Ratio (LTV) is the property’s value compared to the loan amount.
Differences between hard money loans and bank loans
Apart from the term, here are other differences between hard money and bank loans:
Underwriting decisions — Whereas hard money lenders base their decisions mainly on the LTV, bank’s use strict underwriting guidelines that do not have a lot of flexibility.
Creditworthiness — The creditworthiness of a borrower is not a critical consideration to a hard money lender. The property value and ability for the borrower to repay far outweigh credit history.
Source of insight — Licensed hard money lenders have experience and knowledge about real estate matters. They can offer invaluable insights on rental units, commercial property, working with contractors, and so forth. Thus, you will get funding and expert guidance as well.
Easy loan application process — It is hard to get a bank loan because mainstream financial institutions have to follow procedures to a tee. Conversely, hard money lenders can customize requirements to fit a borrower’s needs, making the process easier. download game fire full crack
Quick turnaround — Generally, you will need weeks and even months to access a bank loan. The processing period can be longer if you are using commercial property as collateral. On the other hand, you can access a hard money loan within short timeframes and as short as 24 hours in some cases.
Income source documentation — Hard money lenders are flexible on documents used to validate borrower’s ability to repay a loan, including business bank statements. Conversely, banks require relevant documentation, and usually, they request W2 income.
Final Word
Some of the reasons that might hinder you from investing in real estate include lack of funds, tedious conventional loan procedures, and poor credit scores. However, none of these should hinder your desire to invest. You can apply for a hard money loan to expand your real estate investments.
At Benworth Capital, loans must be backed by real estate (but not all hard money loans do). Feel free to visit Benworth Capital Partners, LLC and learn more on the services they offer. Remember, although hard money loans are often underrepresented in real estate investing, they could be your next ticket to building wealth.