In 2018 alone, 5.96 million houses went on sale across the United States. To add to this, other real estate assets such as raw land also changed hands.
As a real estate investor, home, or property owner, getting a piece of this action can determine if you turn a profit. But what happens when your financing delays (or falls through) and puts your transaction at risk? In steps hard money financing.
A hard money loan can help you access the financing you need to close your transaction due to its unique value proposition. Here is a sharper look at this source of real estate financing.
What Are Hard Money Loans?
In simple terms, hard money loans are short term loans that are taken out against real estate. The real estate could be what you already own, or are acquiring.
Hard money loans are typically provided by private investors and not traditional lenders such as credit unions or banks. Whenever hard money financing is given out, it’s usually for a term of 12 months. However, if the situation calls for an extension, you can get the investor to grant you a two to five-year term.
To get hard money loans, you have to agree to make monthly payments. These payments can either be on the interest or the interest plus a portion of the principal amount. At the end of the loan’s term, you will need to make a balloon payment.
When a lender is looking to issue hard money loans, they look at the value of the real estate. If you have a strong cash position but are offering real estate collateral that isn’t of high enough value, your application will likely be turned down.
That’s because should things go belly up, the lender will sell the real estate to get their money back. As such, what you offer as security must cover the amount of money you’ll receive and other associated costs.
Property Types for Hard Money Financing
A hard money lender provides financing according to their area of specialization. If the lender feels they have adequate market knowledge in a specific area in real estate, they can trust their evaluation. As a result, it will be easier for them to assess whatever risks they see with the deal accurately.
For example, a hard money lender who has specialized in raw land won’t be comfortable in doing residential housing deals. A lack of experience in the residential side of the market will make them not have confidence in any assessment they make.
Thus, when you first engage with a hard money lender, it’s critical to find out what they specialize in. That then helps you determine if they are in a position and are willing to facilitate the type of loan you require.
If you are an owner-occupier of your property, you’ll have a hard time securing hard money financing. Hard money lenders shy away from such applications due to the additional regulations and rules that come with owner-occupied properties.
Additionally, most hard money financiers prefer being the party that provides the loan in the first position. If you approach them for second position financing, the odds are high they will turn you down due to higher risk.
Hard money lenders also don’t sell any loans to Fannie Mae or Freddie Mac.
Common Hard Money Loan Types
There are a few variations to hard money financing, although all share the common trait of using real estate as security. The particular type of hard money financing that can best work for you depends on the reason behind your application.
1. Mortgage Refinancing
The most recognizable type of hard money financing that many might recognize is mortgage refinancing. When taking out refinancing, it is usually to pay off a loan (or more than one) that’s secured by the property. The result is a new loan that’s typically larger.
Upon refinancing, you can choose to roll the costs of the new loan in the overall balance. Another option is to pay the costs associated with the loan out of your pocket.
In cash-out mortgage refinancing, you can receive some of the proceeds once you settle the old loan plus its costs.
2. Bridge Loans
If you want to buy a new home before selling the one you currently have, a bridge loan is what enables you to do that. A bridge loan advances you the money you expect to receive from selling your current home to purchase the new one.
You will notice bridge loans being more common in seller’s markets than when buyers have more bargaining power.
3. Equity Loans
A home equity loan is hard money financing that acts as a second mortgage. Once you build up enough equity in your home, you can take out a second loan against the equity on top of your primary mortgage.
Not all states offer you the opportunity to get an equity loan. If you plan to leverage it, you should research further before getting the first mortgage.
The Benefits of Using Hard Money Financing
There are a few reasons that can make hard money loans a compelling option for you. Here are some pros.
1. Faster to Access
Since a hard money lender focuses more on the value of the real estate security and less on your financial position, you can get the money faster. In a hot market with several offers competing for quality opportunities, getting your financing more can be the key to success.
Hard money lenders don’t follow the same underwriting procedure as traditional ones. They instead prefer to access each application individually. Such an approach allows you to secure financing that might otherwise be out of your reach with a traditional lender.
3. Deal Velocity
At its core, hard money financing empowers you to leverage other people’s money. For investors, this becomes critical as it means they can close more than one deal at a time. The more opportunities you can get into means your deal velocity, and potential for income, increases.
Close Your Transaction in Time
Getting the money to close a real estate transaction without delay is critical, especially in a hot market. Unlike traditional financing, a hard money loan helps you move through the underwriting process faster so you can seal your opportunity.
Financing Hard Money understands your need for fast and flexible funding sources for your real estate deals. Contact us today to begin making hard money capital work for you.