Choosing a loan is not — and should not — be a ‘one size fits all’ experience. After all, your needs when buying an existing home are going to be different than your monetary needs when building a home from the ground up. Real estate investing adds a further set of hoops to jump through since the home isn’t going to be your primary residence. With all that in mind, finding the right loan should be high up on your priority list. But with investment properties, the typical bank loan may or may not be the right option.
Comparing Loan Options
When it comes to home loans, many banks offer a range of different mortgage options. Many of those loan options offer more flexible terms in regard to a down payment or credit score — though mortgage insurance is often required to support that flexibility. However, that flexibility is in place primarily for first-time buyers and to help low income families purchase a home. The assumption is that when homeowners are looking to sell their home and buy a new one, or to buy an additional property, they have the financial stability to do so. It’s seen as more of a privilege rather than a necessary purchase. Because of that, the flexibility offered by bank loans is a lot less flexible in these situations, particularly if the loan is going to be for an additional property.
Hard Money Loans
Hard money loans are an alternative to traditional bank loans. These lending options are provided through private lenders, with the intention of offering the sort of flexibility that is needed for investment properties. The big difference is that hard money loans are built to work for multiple needs in a single loan. For example, if you are buying a property to fix up and sell, you will need the capital for the repair work. Hard money loans are designed to provide the funds needed upfront for the land and property itself, as well as ongoing money dispersal to pay for contractors and materials throughout the flipping process. If you’re looking to invest in a single property or an apartment building, hard money loans may be the better option.
Banks Vs. Hard Money Lenders
The primary difference between bank loans and hard money loans is how the loan is guaranteed. Banks will need to do a thorough check of your financial history and credit score to gauge how risky of an investment you are. If you have a poor credit score or a small down payment, you will likely pay a higher interest rate (and private mortgage insurance) to guarantee the loan.
On the other hand, hard money loans are guaranteed by the property you purchase. In the event that you cannot pay, your hard money lenders will take over ownership of the property. This allows hard money lenders to provide a greater flexibility when it comes to your credit score, your finances as a whole, and what you plan on doing to the property.
Who To Choose?
The answer to the question of who to choose for your loan will depend greatly on what kind of property you’re looking to purchase, what you plan to do with it, and your financial situation. As we discussed above, bank-provided home loans are a good option for your primary residence, particularly for first-time buyers and those with good credit and solid finances. Hard money loans are the more flexible option for investment properties, vacant land, and even new construction.