Real estate investment can be a great way to earn a living or get additional income. Unfortunately, most people don’t have the cash to purchase property outright and often need to obtain loans. Hard money loans can be a beneficial option for investors.
What Is It?
This loan differs from other types of loans in primarily three major areas. First, the lenders are usually private investors. Second, the length of the loan is typically short-term: normally twelve months and typically does not exceed five years. Usually, the borrower will pay interest rates and some portion of the property’s value during that time. At the end of the loan period, the rest of the property’s full amount will normally be due in the form of a balloon payment. Finally, the loan is secured by real estate property. However, this property may be the reason the investor is borrowing the money or it may be just another property the investor has.
Who Should Use It?
Due to their high interest rates, a hard money loan may not be for everyone. If the borrower has a steady income from an employer, a good credit score and is in no great hurry to obtain financing, traditional loans may still be the better option.
However, for individuals who have a poor credit score or are self-employed, this type of loan may be more effective. Since lenders of this loan generally rely on the value of the property rather than the borrower’s credit history, their approval typically does not rely on credit scores or a steady paycheck. This is especially beneficially for real estate investors who earn their livelihood by buying and selling property or renting out units.
Additionally, approval for a hard money loan is usually much faster than traditional types of loans. For lenders who may not want to wait around to get approved, this allows them to get the money they need quickly.
How to Qualify?
These lenders may have less stringent requirements than traditional lenders. Nevertheless, this does not mean that they are simply willing to give away their money. Borrowers will often need to show the lenders their plan for being able to repay the loan such as improvements to the property in order to attract potential lessees. Since the lending term generally ends with a balloon payment, borrowers will also need to make sure they have enough money to be able to make the large payment.
Hard money loans can be a good source of financing for individuals who want to purchase real estate property and are not able to qualify for a traditional loan. By focusing on the value of the property, this loan generally relies on innovation and future thinking instead of past performance.
