Are you wondering if applying for a hard money loan is a smart idea? Many investors have been periodically using hard money to fund real estate projects for decades, but other investors are not aware of what hard money loans are or how they can strategically take advantage of their benefits. Some may not even think that hard money is a legitimate source of financing for real estate projects. The reality is that the use of this type of financing as an alternative to bank financing makes exceptional sense in specific situations, and there are many legitimate, reputable hard money lenders that you could work with. In order to take advantage of this creative funding source, you need to know more about who makes these loans and what types of scenarios the loans may be used for.
What Do You Need to Know About Hard Money?
The best way to understand what hard money loans are is to compare them to real estate loans that you may be more familiar with. Like real estate loans from banks and major financial institutions, hard money loans are secured by real estate. This could be residential or commercial real estate. Some hard money lenders consider all types of projects, and others only consider residential properties or commercial properties. While bank loans and hard money loans have the collateral type in common, there are very few additional similarities. Banks only lend on projects that comply with their specific underwriting guidelines, and there are usually requirements that the property and the applicant must meet. Hard money lenders lend on projects that make financial sense without trying to conform to specific guidelines. In addition, the primary criteria analyzed is the property. Applicant factors, such as credit scores and personal income ratios, are not usually reviewed by hard money lenders.
Who Are Hard Money Lenders?
Bank loans work well for some situations, but you may currently have a project that does not comply with bank requirements and guidelines. Hard money may be a reasonable financing solution to consider, but you need to know who hard money lenders are. Hard money is essentially private money. When you apply with a hard money lender, you are applying directly with the private investor or the company that is funding the loan using its own money. Hard money lenders set their own rules, and they are willing to look at projects creatively if the loan request is reasonable and sound. As you might imagine, this different approach to lending results in different loan terms. Hard money loans typically have interest-only payments or partially-amortized payments. The loan term is usually 18 months or less, and a balloon payment is required. Another notable difference is that hard money interest rates are significantly higher, and loan costs may also be higher.
What Projects Are Hard Money Loans Suitable For?
Hard money lenders are able to expedite the loan process in many cases, so closing may occur in a matter of weeks rather than months. Because of this, hard money loans are ideal for projects that need to close quickly. With the short term of a hard money loan and the balloon payment structure that creates affordable payments, hard money is ideal for turnaround scenarios. These scenarios often involve renovations, but they also can involve increasing rents in a commercial property. Generally, hard money loans are often used to improve a property in some way so that a profit is generated or so that the property may qualify for permanent financing.
The creative approach that hard money lenders take makes this type of funding ideal for many situations. If your project is not well-suited for a bank loan, reaching out to a few hard money lenders is a smart idea. After you learn more about hard money financing options that may be available to you, you can better decide if this is the right path to pursue to fund your project.