Benefits of Hard Money Loans for Real Estate Investors
If you are trying to get money for a real estate purchase, the bank may have stopped you cold in your tracks. Banks like to deal in low to no-risk deals. Residential properties that will act as the home for the buyer and his or her family seem like a pretty safe bet to them. Banks usually view funding someone’s dream of flipping a distressed property and turning a profit as a long shot. Since banks like to play it safe, what is the daring property investor to do? The answer is hard money loans.
Some lenders are willing to extend funds to property investors under the right conditions. If you are willing to put up the property for collateral and pay some high-interest rates and fees, you can generally find a finance company to give you the funding needed. Hard money loans usually act as a short-term solution for investors who are working on fixing up the property to qualify for a regular mortgage at a lower interest rate. Lenders design these types of loans to turn a quick profit and help out buyers who cannot get a bank loan.
Getting a hard money loan is not a particularly hard undertaking. If you have less than perfect credit, you can still usually qualify. The lender secures the loan with a lien on the property. That means if you default on your loan payment, the finance company can foreclose on the property. Usually, however, they will offer to extend the loan, but on the condition that it carries a higher interest rate and, of course, more fees. Since this can become burdensome rather quickly, most borrowers pay off the loan as soon as they can.
The plan usually works out to be something similar to the following. You, the investor, finds a distressed property with a lot of potential at a great bargain price. You approach several lenders to compare the rates of hard money loans. Remember, these loans will be considerably higher than a conventional loan. Once you find a loan to your liking, you work as quickly as possible to fix the property up and make it presentable. When the investment is up to a certain standard set by the bank, you can typically get a regular mortgage at a drastically smaller interest rate. At that point, you pay off any hard money loans and start enjoying lower payments.