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Understanding hard money loans?

For the vast majority of people looking to buy a home, taking out some form of loan is a necessity. People simply don’t have the hundreds of thousands of dollars lying around that is necessary to purchase real estate. But acquiring a loan can often be difficult, time consuming and costly. Some real estate buyers may not have the time or ability to meet the difficult standards to get traditional financing. For these buyers, hard money loans may be an attractive alternative.

What is a hard money loan?

A hard money loan is a form of short-term financing that is used by certain real estate purchases who either cannot meet the requirements for a traditional mortgage or who have other constraints that makes regular mortgages unattractive. Hard money loans are usually issued by individual investors or groups of investors on a short-term basis, usually not exceeding 18 months. However, many hard money loans may have terms as short as a month or less.

Who can benefit from hard money loans?

One of the main benefits of hard money loans is that anyone with assets can qualify. Hard money lenders typically do not care about the income status, credit history or general ability to pay back the loan nearly as much as traditional lenders. This means that anyone with poor credit or unsteady income may be able to benefit from a hard money loan.

But the main use for hard money comes from real estate investors. In particular, people who specialize in buying, improving and then flipping homes often find that hard money loans are an excellent way to secure short-term financing. This can be especially true on homes that require extensive repairs before they become marketable to a wide range of potential home buyers.

For short-term real estate investors, hard money loans can be an invaluable tool. Hard money lenders will often charge significantly higher interest rates than traditional lenders. But in return, borrowers can get large loan amounts for small up-front costs. Additionally, hard money lenders often require no down payment of any kind. This can result in huge out-of-pocket savings for those looking to fix and flip homes.

As an example, an investor who finds a $100,000 home in need of serious repair will often have to put down $25,000 or more in cash as the down payment. In addition to this, the investor will have to foot another $5,000 or so in closing costs and will have to go through the entire approval process, which can take up to three months. If the buyer is skirting right on the edge of the approval threshold, there is a chance that they may go through the entire process and ultimately be denied the loan. On top of this, in markets where homes are typically selling within one or two months, attempting to use traditional financing will often result in losing the sale to another buyer.

By contrast, hard money lenders can often get even unknown investors cash in hand within a week. Once real estate investors have established a relationship with a hard money lender, they may be able to get the money crucial to nabbing a home to the investor within a few hours. This can give investors a huge leg up in competitive markets, opening up an entire universe of potential purchases that wouldn’t be available to them with traditional financing.

However, the big factor that makes hard money loans an indispensable tool for home flippers is the potentially huge reduction in up-front costs. A $100,000 home purchase using hard money may cost the investor as little as $5,000 out of pocket. Compare this with the $30,000 they were paying when using traditional financing. These reductions can allow investors to leverage their capital far more effectively than would otherwise be possible.

Hard money loans are not appropriate for every home buyer. But for those with the experience and need for short-term financing, they can be an effective weapon in any investor’s arsenal.

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