Hard money loans are a short-term funding option for investors secured by real estate. For many years house flippers, landlords and other real estate investors have used hard money loans to finance their projects and better manage their cash flow.
Investors typically work with hard money lenders rather than conventional lenders such as banks, mortgage brokers, or credit unions to finance the repair of the property in addition to the purchase cost.
Unlike conventional lending options, the loan amount is based on the future “after repaired value” of the property versus the “as-is” value. This allows the borrower access a much higher amount of leverage for a real estate purchase than what would be available through more traditional financing.
How Do Hard Money Loans Work?
Depending on the situation, a traditional mortgage loan for a property purchase may not work. This is where hard money loans enter the game. It’s a way to borrow without having to use a traditional mortgage lender.
The hard money loan is secured using some type of collateral, usually property (real estate), not by credit. In addition, most lenders will also want to get a feel for your investing track record so be prepared to disclose information about how many flips you have completed.
Savvy investors tend to work with the same lender from project to project in order to establish a relationship and build trust, which can be beneficial during the underwriting process.
It’s the value of the collateral that’s important when securing a hard money loan, which comes from investors who may be individuals or a company like Sherman Bridge.
Hard Money Loans: Pros
For borrowers in need of quick cash, the hard money loan may be the solution. Speed or cash-in-hand typically ranks as the top “pro” reason for securing this type of financing.
Other reasons that fall into the pro-column include but are not limited to:
- More flexible loan process than a traditional mortgage
- A less restrictive underwriting process moves things along more quickly
- Fewer pieces of documentation required
- Not as invasive because lender not looking at credit status
- Bad credit or other financial issues not deciding factor since the loan is collateral-based
- Collateral-based loans can mean more leniency for approval
- Potential to adjust payment schedules more easily
If cash flow is an issue, then hard money loans may be the answer. Lenders can be more accommodating because they’re using their own money.
In addition, it’s the value of your property that helps determine how much you may be able to borrow.
Hard Money Loans: Cons
Like anything else in life and business, there are cons that go hand-in-hand with the pros. It’s important to know the potential downsides of choosing to go with this type of loan.
For some borrowers, the biggest negative may be that these loans are sometimes more expensive. You shouldn’t always expect a low-interest rate. On average, hard money loans come with interest rates in double-digits.
Remember, hard money loans are a short-term solution to a cash-flow problem. If a longer loan term is needed, then this may not be the best option for you. In addition, hard money loans have less government regulation and a lower loan to value ratio.
According to the Balance, “A loan to value (LTV) ratio describes the size of a loan you take out compared to the value of the property securing the loan.”
Experts say when applying for a hard money loan to expect the LTV to fall into the 50% to 70% range. However, Sherman Bridge also offers loans with higher LTV, but investors can expect these loans to have more restrictive terms than those on the lower end.
How to Determine a Lender is Legit
Before taking out any type of loan for a real estate purchase and investment, it’s critical to research.
Check online reviews for lending companies and talk to other local home flippers and landlords who have worked with ones they like and recommend.
Don’t ever be afraid to ask questions, especially when it comes to money, investing, and your business. Consider a few helpful questions to ask:
- What are your interest rates?
- Can you share a few customer reviews?
- What is your license number?
- Are there any fees required?
- Are there penalties for paying off a loan early?
- What happens if I have a late payment?
Check for your state’s legal interest rates as well. FindLaw offers links to this information by state.
Hard money loans can be useful. When flipping houses, you know you need to work fast to acquire the property before it’s snapped up by the competition. The old adage, time is money, generally holds true in the business of house flipping.
Sherman Bridge knows how important it is to you to be able to obtain the hard money funds needed when purchasing an investment property—and fast.
In just 30 seconds, the same time it takes to reheat a cup of coffee in the microwave, you can be pre-qualified. In just 30-minutes, half the time it takes to watch your favorite home improvement show, you can be pre-approved.
Look to Sherman Bridge for your hard money loans when you want a company with a reliable reputation and an A+ rating from the Better Business Bureau. Apply today to see about your qualifying loans.