When it’s time to buy a home, first time buyers are often surprised by the number of different mortgage financing options available. Options will vary based on the property type, location, the buyer’s credit, down payment size, and so much more. So, if you’re thinking about investing in real estate, it stands to reason that there is more than one financing option for you as well. A hard money loan is one of the most common options for real estate investors, especially those who want to flip houses. So how does it work?
Hard Money Loans
Let’s start with the basics. As is the case with pretty much any loan ever, lenders will want to see proof that you will be able to repay the loan. Hard money loans are a bit different from a standard mortgage, however. A traditional mortgage lender will look at credit history, debt, income, and down payment amount to determine whether a borrower is qualified or not. It’s generally a lengthy process, no matter how great your credit score or how much of a down payment you bring to the table.
If you flip houses as your only source of income, you can see why a traditional mortgage might be more complicated. A hard money loan will still look at things like credit history and down payment, but those things aren’t as important. Instead, the key component for a hard money loan is the collateral securing the loan — the property you are purchasing. If something goes wrong and you cannot pay, hard money lenders will use the collateral to get their money back. Because of this, the value of the property you intend to purchase is typically more important than those elements a traditional mortgage lender.
When To Choose Hard Money Loans
Since a hard money loan uses the property as collateral instead of that long process of looking into credit scores and income, why don’t we use hard money loans for every property purchase? It’s because a hard money loan generally has a higher interest rate than more traditional mortgage options. Hard money loans generally have a higher interest rate because they’re meant to be short term loans of about a year to five years. While they can be written for longer, it may or may not be financially wise to do so. But if they’re more expensive, why do borrowers choose a hard money loan? The answer often comes down to time, terms, and approval.
As we mentioned above, traditional mortgages take quite a while to process, approve, and close. For many real estate investors, however, time is of the essence. Since hard money lenders will use the property as collateral, the lender doesn’t have to spend weeks (or months) combing through an applicant’s financial history. A hard money loan can be processed and approved much more quickly. When trying to buy foreclosures and properties being auctioned, time matters. Working with a hard money lender can give you the edge when it comes to time.
Another big difference is that hard money lenders can offer more flexibility in the loan’s terms. They don’t use the same standard underwriting process that traditional loans do, so we can offer more wiggle room when it comes to repayment schedules, down payment size, and other terms. This is particularly helpful because different fix and flip projects will take different lengths of time to complete. With more flexibility in loan terms, you can get a loan that matches the scope of your project.
The hardest part of any traditional mortgage option is showing you meet the qualifications well enough to get approval. The process is made harder if you have a foreclosure or other credit concerns in your financial history. However, since hard money lenders know they will have the property as collateral, it is often easier to get approval despite past financial concerns.
Want to learn more? Contact Colorado’s local hard money lenders for answers to your questions and to discuss your next project. At TABS, LLC, we prefer to work with each of our borrowers on a project-by-project basis to help you get the best loan for your needs. Start by filling out an initial application to get started!