Luckily, those who are new to the house flipping world don’t have to cough up their own money to pay for their first project. Since getting a down payment for your own house is hard enough, a hard money loan can be a welcome option to make the process much easier.
But what is a hard money loan and how can you get one? Learn everything you need to know about this type of loan with the help of this handy guide. We break everything down into layman’s terms so you know exactly what you need to do to be successful.
What is a Hard Money Loan?
Also known as bridge loans, hard money loans are a great tool when you need a short-term lending option. Real estate investors often choose hard money loans to fund a renovation because they are easy to get, allow them to get money fast, and more convenient than a typical mortgage. These factors allow the investor to make a quick and impressive profit on their house flip.Hard money loans are given out by private lenders according to the value of the property. Most lenders use the after-repair value, or ARV, to estimate the value of the property when the entire project is complete.
Should I Get a Hard Money Loan?
Wondering if a hard money loan is right for you? This could be a good option if you’re a new house flipper because you don’t have to have an excellent credit score or other collateral to get one. Hard money loans are also ideal for someone looking to buy a short-sale or foreclosure home.These loans are flexible and convenient, as they can be used for any type of investment including single-family homes, commercial spaces, multi-family property, land, or industrial buildings.
What are the Benefits of Hard Money Loans?
Hard money loans offer many perks in comparison to traditional mortgages or other loan options. Check out some of the many benefits below:Get Money Quickly
Many people choose hard money loans because of how fast you can get the funding for the renovation. When you apply for a hard money loan, you can have the money in your bank account in just days, rather than waiting 30 days or longer with a traditional loan. Mortgages also require loads of paperwork, while applying for a hard money loan is a relatively quick process.
Eligibility
If you have bad credit, it may be impossible to get a typical mortgage. This makes a hard money loan the ideal way to fund your house flip. These types of loans use the value of the property as collateral, rather than a down payment or impressive credit score.
What are the Drawbacks of Hard Money Loans?
Though hard money loans have many benefits, there are some drawbacks to consider before you make your decision to apply. Here are some elements to think about when deciding if hard money loans are right for you.Higher Cost
Hard money loans usually have higher interest rates, origination fees, and closing costs to compensate for the convenience of the loan.
Shorter Repayment Time
Keep in mind that hard money loans are meant to be short-term, meaning they have a shorter repayment period than typical mortgages. You’ll have to pay fees or fines if you don’t stay within the pay-back period.
