In real estate, things change all the time. One day your buyer wants a multi-head cascading rainforest shower and the next day they are all about low-flow and efficiency (or asking if they can have both). An attic that was going to be unfinished suddenly becomes a new room for the in-laws. You have to be fast, nimble, able to adapt, and ready to change your strategies when needed. Unfortunately, you are also usually tied to having the money to do so.
When you need to take out a loan, you probably think of going to a bank and all the bureaucracy it entails. Unfortunately, those expectations usually deliver. Traditional lending institutions tend to be very risk-averse and slow-moving, which is a hindrance in real estate. Sometimes you need to get a loan quickly so you can get on with your project. That’s where hard money loans, perfectly suited for such a dynamic industry, come into play.
Qualifying for a Hard Money Loan
There are a lot of problems with going through traditional lending channels. For one thing, they tend to evaluate your loan-worthiness based on credit, which, given the vicissitudes of the real estate market, might not always be the best. That usually isn’t a fair reflection on the potential of your current project, however. A non-traditional hard money lender will look at income and credit, but those are just two of many factors, and not particularly heavy ones at that.
Because the hard money loan is secured by equity, the primary criterion is establishing that the value of the property being purchased is sufficient enough to be used as collateral. Depending on the type of hard money loan being considered, lenders may also need to get a better understanding of the borrower’s experience, past projects, and current investments. This is usually the case for ground-up construction, which requires a certain level of expertise to execute.
In essence, then, getting a loan is weighed against your project. Hard money loans are, in a way, considerably more democratic.
The Benefits of a Hard Money Loan
When applying for a loan at a bank, it often feels like they want you to account for every nail and hopefully predict the weather for the next six months. It is itemized and haggled over. That’s not the case with hard money loans, which are basically as good as cash. There is more flexibility with the terms and what the funds can be used for since each borrower’s situation is evaluated individually. This freedom makes hard money loans a good choice for a wide variety of investments, especially when renovation costs are involved.
Because hard money loans aren’t based on credit, their limitations are largely based on the value of the property. Here, the loan-to-value ratio rarely exceeds 70%. Other places have a maximum limit. Socotra, for example, is at $6 million for fix-and-flip loans. Again, these limitations are project-based, so they give you the flexibility you need to succeed.
Hard Money Loans Put You on the Fast Track
Maybe the single biggest benefit of hard money loans is that they move much more quickly than conventional loans. Instead of considering credit scores and income, hard money lenders are able to award loans quickly because real estate equity is the primary consideration. After you fill out an application, an appraiser will value your property and both sides can come to an agreement.
Traditional financing can often take four to eight weeks to complete, whereas hard money loans can be pre-approved in a matter of days. Closing a hard money deal typically takes just two weeks, but can even take as little as five days. When time is of the essence, many investors turn to hard money loans first and then work on securing long-term, conventional financing if necessary. This is especially helpful when it comes to time-sensitive or cash-friendly projects.
Hard money loans are often used for the following investments:
- Real estate transactions that require all cash
- Purchasing a home at auction
- Funding renovations during a rehab or fix-and-flip project
- Ground-up construction of commercial and residential properties
- Financing properties that can be difficult to fund through traditional lenders because they are deemed high risk
- Financing a property that is being converted for another use, such as turning a farmhouse into a B&B or a gas station into a residential property
- When it isn’t possible to secure traditional lending because of appraisal issues
- When the borrower is self-employed and doesn’t have a tax filing history deemed adequate by traditional lenders
You pride yourself on being able to do the job well and you know what it takes to make it in real estate. But sometimes you need a loan right away, regardless of credit and without having to jump through all the hoops at a major bank. A hard money loan could be exactly what you need to get to work and build something.