When you bought your home, how long did you spend finding financing? There are so many different mortgage options out there that it can take a while to wade through and find the right option for your needs. Were you looking in a rural area? You probably came across the USDA loan option. Did you have a smaller down payment? An FHA loan may have been the best bet. Choosing a mortgage option depends on everything from the type of property and its location to your credit score, income, and financial history. Now, add in the extra elements that come with flipping a house, and the process gets even more complicated.
Financing Real Estate Investments
Buying a house to renovate and resell (or rent out) is an entirely different can of worms than the sort of can opened when buying a house as a permanent residence. For example, most traditional mortgages don’t include any provisions for repairs or renovations. If you want to modify the home, you’ll need to save up or take out a separate loan. In addition, there are a few other differences that crop up during the buying and flipping process that make financing alternatives a necessity for many real estate investors. Here are some of the big differences between conventional mortgages and hard money loans to help you determine the right financing for your project.
The term “conventional mortgage” is termed such because these are options are underwritten according to the requirements set forth by Freddie Mac and Fannie Mae — even if they aren’t sold to one of the two organizations. All other options, even those insured or guaranteed by different government organizations, are considered private loans, no matter how traditional they appear. However, the question of traditional versus conventional is irrelevant because the underwriting process and terms are pretty similar across the board.
The standard mortgage process as most know it involves a complex underwriting process that depends heavily on looking at debt, income, down payment, and other financial factors to determine how likely an applicant is to pay back the loan. For some loans, the location or type of property may matter, but a person’s finances are the biggest element that gets considered. If a borrower has poor credit or a foreclosure in your history, it’s difficult to get approval, and the interest rate will fall at the high end of the spectrum. And if you need to get approval quickly? Forget it.
Hard Money Loans
If you know anything about flipping houses, you may have already spotted a few issues presented by the traditional mortgage. For one thing, the traditional mortgage doesn’t typically come with provisions to renovate. Since most traditional loans won’t lend much above the cost of the property, it isn’t a great option for financing a property purchase you’ll need to do extensive work to. A hard money loan takes this into account. The initial payout will cover the cost of land and structure, and the rest of the agreed-upon loan amount will go into an escrow account. From there, payments will be made at certain intervals to pay for construction materials, permits, inspections, and so on.
The other key difference between traditional mortgages and hard money loans is that the latter uses the property itself as collateral. This provides some pretty drastic time differences. The underwriting process for a traditional mortgage is concerned with your financial history, debt, and income. Underwriters will go through all of that information with a fine-toothed comb before making any decisions about lending you money, and the process can take weeks or months. Many real estate investors don’t have the luxury of that much time; a foreclosure or a home up for auction will need to be financed in hours or days, not weeks. Hard money lenders use the property itself as collateral, so a loan can be approved much faster.
Whether you’re just starting out flipping houses or you’re a seasoned pro, the right financing can make all the difference in the success of your project. Submit an initial application with your Colorado hard money lenders, and let the TABS, LLC team help you start your next project off with a solid foundation.