Whether you’re planning to flip or rent, real estate investing can be a lucrative and effective way to diversify your portfolio. But there’s a reason it’s called an “investment”—and not everyone has the cash upfront to purchase a property directly. If that sounds like your situation, you may want to consider a hard money loan. Learn how hard money loans work, their key benefits, and if they’re right for your investment project.
What is a hard money loan?
Hard money loans (also called bridge loans) are short-term, asset-based loans that you can use to finance an investment. These loans are not for owner-occupied properties: they’re used specifically for real estate investors and house-flippers to fund a renovation or investment property.
Hard money loans are different than traditional loans because they’re issued by private lenders instead of banks. These loans tend to be more short-term, with repayment periods measured in months instead of years.
How do hard money loans work?
Banks often don’t want to finance down-and-out properties because of their poor condition. But hard money loans are based on the expected value of the property after it’s repaired (ARV) instead of the actual value (AV) that bank mortgages use. Since hard money loans are asset-based, your ability to get financing isn’t determined by your creditworthiness, either.
Hard money loan requirements vary greatly because private investors and companies provide the loans, so they’re allowed to create their own policies. Overall, the process is similar to a traditional loan, although it often happens much faster. You submit your application and it goes through the underwriting process, then you move on to closing, and finally service and receive the loan.
The 3 benefits of hard money loans
Hard money loans can be a great option for an investor. Compared to a traditional mortgage for an investment property, hard money loans come with benefits like:
- Convenience: Obtaining a hard money loan isn’t nearly as difficult as securing a traditional loan. Thanks to red tape and regulations, the mortgage lending process is very time-consuming. Financing for a hard money loan, on the other hand, is often completed in days or weeks (rather than months). If you’re an investor or developer with a tight timeline for your investment project, this is a tremendous benefit.
- No prepayment penalty: Traditional mortgages may offer lower interest rates, but if you pay your loan off early, they can hit you with a hefty prepayment penalty. Most hard money loan lenders don’t charge this type of penalty. This means investors can pay off their project early and save money on interest payments.
- Partnership: Most people wouldn’t call their relationship with their mortgage lender a “partnership.” In fact, several different companies may service your loan before you pay it off. That’s not the case with private lenders because they offer in-house servicing. Hard money lenders can be a great resource throughout the entire rehab process. Here at Max Mortgage, our investment is in you, and not just your project.
When hard money loans aren’t a good fit
Hard money loans are a great option for many investors, but they’re not right for everyone. There are two important factors that can affect whether a hard money loan will work for your investment property.
Cost
Obtaining a hard money loan can be a much easier and faster process than a traditional loan, but you do pay a premium for the convenience. Fees and interest rates are higher because lenders are taking on more risk by lending on a distressed property.
Shorter repayment period
The purpose of a hard money loan is to help you fix your property and put it on the market as quickly as possible. Because of that, hard money loans have much shorter repayment terms than traditional loans. Most require total repayment within 8-12 months, and it’s rare to find any hard money loans that exceed 24 months.
This isn’t necessarily a bad thing, but it can be a challenge if you hit an unexpected problem during rehab. This is why it’s so important to build a lasting relationship with a trusted lender before you take on a hard money loan.
The bottom line
Hard money loans can be a great fit for investors who need fast funding for their investment property. If you’re looking for a lender, make sure you find a reputable company with competitive rates and a long, successful track record in the industry. With over 115 years of experience in real estate, Max Mortgage understands your business because it’s our business, too. Reach out to us to discuss your project and see if Max Mortgage is right for you.
