Understanding Hard Money Loans

Finding the perfect fixer-upper is a dream for lots of people, but what happens if you find it before you have the financing to purchase it? For many people, hard money loans are the obvious choice. This type of financing can help you rehab a home for your family or, more commonly, fix and flip multiple properties in your area. Learn how they work to determine if they are right for you.

What Is a Hard Money Loan?

A hard money loan is a loan funded by a private investor. Sometimes, finance experts refer to them as bridge loans or private money loans. Funding for these loans depends on the value of the property being funded rather than the financial history or credit score of the borrower. In many cases, obtaining a hard money loan is easier and faster than applying for traditional bank financing. Hard money loans typically have terms of six months to one year. In rare cases, the lender can extend the terms up to five years. Specific terms vary between lenders, and monthly payments may be interest-only or interest and a portion of the principal.

What Are the Requirements to Obtain a Hard Money Loan?

The qualification requirements to obtain a hard money loan vary between lenders as well as between geographic locations. Although some large lenders span many states, most of them only work in small regions or even local cities or counties. Receiving financing is depending upon your experience in the industry. If you are new to it, expect to pay a higher initial rate. However, experienced borrowers will see lower rates. Most lenders look at your repayment progress for at least two years prior. These loans are only available for some types of properties, such as single-family homes, multi-family buildings, and condominiums.

When Should Someone Choose a Hard Money Loan?

People who flip houses or other residential properties are typically the ones who benefit from this type of financing. They are especially ideal if you have a pending investment deal that is too time-sensitive for the traditional loan process. Bridge loans are also a good idea if you don’t have a high personal credit score or cannot access cash to set a pending deal in motion. Depending on your qualifications and experience, some lenders will cover up to 100% of your rehab costs. Others may cover a portion of them. Regardless, private loans are a good choice for people who are in a time crunch.

If you think hard money loans are right for you, make sure you work with a reputable lender. Look for a company that is licensed and insured, experienced at providing bridge loans, and offers fair rates.