When do you need hard money lending?
Hard money loans are primarily used in real estate transactions and are funded by either individuals or private companies (banks don’t have this financial tool on their offer).
Furthermore, the hard money loan is different from the standard loan by the fact that it doesn’t measure the borrower’s creditworthiness but the property’s potential for growth and income.
However, the lending term is typically short (one to three years) and the interest is not exactly low. So why would anyone consider a hard money loan over a traditional loan?
Well, there are several situations when it makes a lot more sense to go to a lender such as HardMoneyHome.com than to go to a bank. Today we are going to discuss the top three most common situations.
1) To free up funds for a new home
Many homeowners find themselves in a weird position when they want to buy a new home while the old one isn’t sold yet. After all, property is not liquid money – it takes time and patience to turn a house into funds if you go via the traditional route.
This is where a hard money loan makes sense. The homeowner can use the current house as collateral to get approved for a loan.
When this happens, he/she will have the funds to purchase the new property without having to take on a new mortgage or prolong an existing one.
On the other hand, when the old property sells, they will have the funds to repay the loan and continue their life unaffected.
2) For property investment
Property investment is one of the most common situations when a hard money loan makes sense.
Let’s say you want to try property investment. You did the research and found the perfect property that can get you started in the business. However, you are low on funds and your creditworthiness is also low, which means conventional loans are out of the question.
In this case, a hard money loan is a great option because the lender doesn’t care as much about your creditworthiness. Still, they do care if you own property or if you have home equity.
They also care about the debt-to-income (DTI) ratio and the loan-to-value (LTV) ratio. These factors will be analyzed based on the property you want to invest in and its potential to produce income in the short term.
Overall, if the loan is approved, the funds will be available in a couple of weeks – which is incredibly fast compared to the time it takes with conventional funding.
3) For house flipping
House flipping is quite a popular activity among real estate investors nowadays and can lead to significant income if done right. However, when you first start, you need to make a solid initial investment to get the ball rolling.
If you don’t have this initial investment, you can use a hard money loan by using the property you want to flip as collateral. Of course, it also helps if you already have equity in your personal residence.
In a nutshell, the process is quite simple. When you find a great property you think you can flip and sell for a profit, but you lack the funds for the down payment, it makes sense to get a short-term loan that will take your investment plans into consideration.
After approval, the funds are available quickly and you can use them as needed (either for the downpayment or for the repairs and improvements).
Property investments can still be safe and profitable
Even if COVID-19 has changed the real estate market, property investments are still one of the safest and most profitable investments. So as long as you do your research and consult with the right specialists, you can take advantage of a convenient tool like the hard money loan even if it’s more expensive than conventional loans.
Photo by Towfiqu barbhuiya