Did you know an average American has $90,460 in debt? A loan can be a valuable asset for long-term financial plans.
Although loans are risky and a little expensive, they can be a door to your future success. This could mean earning profits from property, building a career, or securing a home. There are numerous types of loans, including mortgages, student loans, and debt consolidation loans.
However, one popular type of loan is the hard money loan. This loan is known for its suitability for many Americans. Unlike other bank loans, there are no pressures for high credit scores and a payslip to get approvals.
Although – these are not recommended for everyone. Typically, hard money loans are used by professional real estate investors to purchase, rehab and flip properties.
So, what can you do with a hard money loan? Keep reading to learn more about hard money loans.
What Is a Hard Money Loan?
A hard money loan is an asset-based loan. It allows borrowers to secure financing where tangible collateral secures the debt. The term “hard money” distinguishes these loans from traditional bank financing.
Traditional loans use the borrower’s credit score and income levels.
Private investors fund a hard money loan. These loans have higher interest rates than traditional mortgage loans. However, they are easier to obtain.
They aren’t directly affected by credit scores or income levels. Hard money loans have shorter timeframes and longer payback periods. The loan bridges the funding gap between a property’s purchase price and the maximum loan amount a bank will extend against it.
There are two kinds of hard money loans. Some require only equity, while others require both equity and income. If you have a good flow of income, get a loan on both your income and your assets.
Who Are Hard Money Lenders?
When you need some money for your business, you want it fast. A hard money lender can be a great resource. There are different types of hard money lenders designed to meet different people’s needs.
Here is a quick overview of some common types of hard money lenders.
Private Money Lenders
Private lenders are entities that give loans to entities but are not tied to any bank or credit union. They offer more flexible terms. They lend for more extended periods, and the interest rates are flexible.
The interest rates can be as low as 3.75% depending on the interest rate cycle. Private money lenders may not need collateral. They use criteria they feel comfortable with to decide whether to lend you money or not.
Online Lending Companies
Digitalization has made it possible to access hard money loans. There are numerous online companies that offer loans. The interest rates are relatively high. The terms are more flexible than traditional lenders.
Although they operate online, they are licensed to operate in specific geographic areas. Check their area of coverage before you begin the application process.
Bridge Hard Money Lenders
Bridge hard money lenders, also known as gap or interim financing, provide short-term loans, usually given for three to six months. The period can be extended depending on the situation.
The loans these lenders provide are mainly used to finance renovation or purchase of real estate property. Bridge hard money lenders can offer adjustable or fixed interest rates.
What Can You Do With a Hard Money Loan?
Hard money loans can be used for several different reasons. Your options are not limited. Some private lenders only require a good reason for needing a hard money loan.
Here are the different reasons you can apply for hard money loans:
Real Estate Transactions
Hard money loans are a form of real estate financing. Borrowers can use them to acquire, renovate, or develop real property. The borrower’s assets do not secure the loan.
It is secured by the property for which the funds are being used. Imagine the following:
You have an empty lot of land in an up-and-coming area. You want to build a house on it. But you don’t have any money for the construction.
You know that it’s risky business to take out a loan without collateral. However, because you’re building a house, the lender is willing to make an exception. So, you get the loan, build the house, and sell it at a profit.
That’s how hard money loans work in the real estate industry. Hard money loans are used in real estate transactions for these situations:
- When you’re buying a home for more than 80% of its appraised value
- To cover repairs and renovations that bring a property up to code
- To buy a property that needs repairs and renovations
- To buy a fixer-upper for investment purposes
- To finance the purchase of raw land or an undeveloped lot
- To refinance an existing property
- To finance the purchase of a property for resale
A hard money loan is like a regular mortgage, except there are no government guarantees. Note that companies offer loans for specific types of real estate property.
At LendSimpli, we offer loans for a variety of real estate properties. This includes single-family residences, townhouses, 2–4 unit properties, and multifamily 5+ units.
Capital for Business
The most common use for hard money loans is to purchase real estate. But what about other business funding needs? Can hard money lenders also provide business cash or term loans?
The short answer is yes! However, it depends on the type of company and their industry. The credit quality of the borrower(s) also matters.
Hard money loans can be granted for the following reasons:
- Business capital
- Finance equipment purchases
- Business expansion
- Debt consolidation
- Cash flow loans
For your business to qualify for hard money loans, you need two key things. The basic requirement is collateral. The collateral has to be a valuable asset.
This is the property.
Secondly, the business owner must indicate the ability to repay. The borrower must have a good credit score. A good credit score starts from around 620, using the 300 – 850 scale.
Commonly, a bad credit score can anything below 620. However, depending on the lender, a poor credit score can be 670 and below.
Benefits of a Hard Money Loan
Banks and credit unions do not offer hard money loans. This makes it very difficult for people to get the financing they need. They’re expensive, and not all borrowers are qualified.
Hard money loans are a great alternative to traditional bank loans.
With lower interest rates and simpler terms, they are a great option for businesses. Here is an in-depth analysis of the benefits of hard money loans.
Traditional bank loans and bank lines of credit can take up to 45 days or more to complete. On top of that, the banks will require a lengthy application process with lots of paperwork.
Hard Money Loans are non-prescriptive, quick, and efficient. They have an average turnaround time of less than seven days.
Hard money loans are an excellent choice for borrowers who need to close quickly on a deal. They’re often used by real estate investors. This allows them to buy a property and immediately start getting income from it.
There’s no credit check, paperwork, or appraisal required. The borrower only pays a down payment of 10-25% of the loan amount. Also, the lender only needs time for the value assessment of the collateral.
It explains why these loans are fast to process.
It is easier to qualify for a hard money loan than a traditional loan. The qualifying criteria for hard money loans are more flexible. Banks are not involved in the process.
It means you do not need to be credit-worthy to get a hard money loan. People who have either bad credit or no credit can also qualify for the loan.
You have the option to negotiate the terms. The terms of the loan differ depending on where you obtain it. Check the lender’s policy at that time.
Some lenders are willing to offer interest-only payments for the first year or two. They can switch it to principal and interest payments once your equity increases.
Obtaining a hard money loan can be relatively easy for people with good credit. The requirements are flexible, and the interest rates are reasonable.
Traditional bank loans offer a fixed interest rate and a fixed payment schedule. If the interest rates on your hard money loan adjust with the market, you can make payments. This is regardless of whether interest rates rise or not.
The maximum amount you can get depends on the value of the property, your credit score, and the lender’s commission rate. Lenders expect you to put up at least 10 percent of the property’s value in cash or hard assets.
The maximum loan to value (LTV) is 90 percent for a hard money loan. You can borrow up to 75 percent of the property’s after repair value. However, the terms differ depending on the lender.
Commonly, the maximum hard money loan amount is $3 million. The minimum amount is usually around $50,000. Some lenders will lend out less than $50,000, but those are rare.
There are no hard and fast rules for how much you can get from a hard money loan. The amount you get will depend on a variety of factors. This includes the cost of the property, collateral, and credit score.
Get the Best Loan Offers Today
A hard money loan is a reliable financing option for your projects. It can help you acquire a property, expand your business, or cover medical bills. Before applying for any loan, make sure you understand all the terms to avoid frustrations down the line.
LendSimpli offers the best loans for real estate investors. Our rates are competitive and personalized. Our goal is to help you achieve your dreams using a reliable lending experience.
Contact us today to review your rates and get safe financing options.