The real estate sector presents investors with unique challenges, more so in the area of financing. A lot of capital is needed upfront and throughout the project to ensure its success, and that is why many investors depend on leans to get things moving.
In some situations, traditional lending may not be the ideal financing option for investors. This is mainly because of the lengthy approval process, strict adherence to approval requirements, and large down payment requirements that leave investors cash strapped. The good news is that hard money loans eliminate all these hurdles for investors.
What is a hard money loan?
A hard money loan, also referred to as a short-term bridge loan, is a type of loan offered by private lenders. Unlike banks that offer traditional loans, hard money lenders are usually high net worth individuals or companies.
These lenders generally use the purchased property as collateral to ensure the security of their money.
If you are in the real estate sector and have been frustrated by conventional lending options, you may want to consider hard money loans. The good news is that companies like HardMoneyHome.com can help you easily connect with private investors, hard money lenders, and private lenders that live near you.
Difference between hard money loans and traditional loans
1. Time of approval
If you specialize in the fix and flip real estate business, closing deals can be highly time-sensitive. Depending on conventional loans to close deals can see you losing bids to your competition.
This is primarily because traditional loans have lengthy application and approval processes that could take up to two months, and sometimes longer, under some circumstances.
On the other hand, private or hard loan lenders only require the property to be purchased as collateral. This eliminates the need for lengthy and cumbersome application and approval processes.
Additionally, hard money loans take as little as one week to approve. In some cases, hard money loans can be approved on the same day, making them ideal for borrowers who need large amounts of cash over a short period.
Conventional lenders are usually very stringent in terms of adherence to approval requirements. For example, if you are looking to purchase a home that doesn’t meet the Federal Housing Administration guidelines, or your credit score rating is not that impressive, accessing credit for your project from conventional lenders can be difficult.
On the other hand, if you opt for a hard loan, private lenders may be relatively flexible in their approval requirements. Even with a relatively low credit score, a private lender may still approve your loan if you offer a clear explanation for the score and agree on a viable strategy to pay off the loan before the maturity date.
Hard money lenders are often more interested in your success record with similar projects, which guarantees that they will recover their money.
3. Loan purposes
The purpose of the loan is another factor that distinguishes hard and traditional loans.
Traditional loan repayments can stretch over a long period and have relatively low interest. Therefore, these types of loans are ideal for investments such as owner-occupied residences. So, if you are looking to buy a residential home, a mortgage would be your best option compared to hard money loans.
Conversely, hard money loans have short repayments periods and higher interest rates. Typically, repayment periods for hard money loans range anywhere between six months and two years. These repayment structures are designed to give the investor time to improve the property, monetize the asset, and move on to another project making hard money loans ideal for investment properties that are acquired, fixed, and sold for profit.