So you find yourself in a position to grab the perfect house to flip, but you have to move fast before someone else grabs it. Maybe your credit isn't the best and you're not sure you will qualify for a traditional loan. Or maybe you just don't have time for a traditional loan to be approved. So what do you do? One option is to look into lenders who offer hard money loans. Unlike the traditional loans offered by most banks and finance companies, hard money loans have terms that are based mainly on the value of the property being used as collateral instead of the credit score of the person borrowing the money.
Hard money loans are most often made by private individuals or companies that see enough value and advantage in this type of venture that they are willing to assume the potential risk. Most of these loans are repaid quickly, usually within one to three years, so there is a quick return on their investment.
This type of loan is often sought by property flippers. Property flippers are people who purchase a property to renovate and resell, and it works perfectly to use the property itself as the collateral for the financing.
If you are the borrower, the cost of a hard money loan is usually higher than it is for a traditional loan through a bank. You really need to weigh your options and consider the pros and cons before committing to a hard money loan. And you should always check the reputation of the lender you choose by contacting the licensing board to see if they have any complaints against them.
The biggest pro for a hard money loan is that the approval process is much quicker than traditional loans, which means you will receive the money you need a lot faster. Your credit score doesn't matter as much, and is often not even checked. The lender may see the value in the property, knowing that if you fail to repay your loan, they will be able to resell it themselves to recoup their losses.
Another big pro for a hard money loan is that you can negotiate adjustments on your repayment schedule for the loan, adjusting the time frame in which you need to pay back the loan to coincide with your situation and circumstances.
Of course there are cons to this type of loan as well. As mentioned before, the cost to the borrower is much higher. The interest rate you'll be paying can be as high as 15% (traditional loans range from approximately 3% to 6%), depending on the length of the loan. But a hard money lender charges more because they are assuming more risk. Some lenders also charge an origination fee of up to 10% of the loan, so it's important to find out if your lender charges this fee.
The loan to value ratio is lower than on traditional loans, meaning that you will only be able to borrow about 50% to 70% of the value of the property you're using as collateral (for a regular mortgage it's about 80%).
Naturally you need to do your research before applying for a hard money loan. But if you don't have the best credit score, or if you just need the money quickly, this could be a viable option for you.