With the real estate market becoming more and more popular, investors had to start looking for new lending options to finance their projects. This is where hard money loans for real estate projects come in. They are perfect for these kinds of projects. That being said, before you decide to get a hard money loan, it is crucial that you inform yourself first about how they work.
If you dive in without understanding the concept and the risks, you are bound to lose all your money. On the other hand, if you have already grasped the basics of how these loans work, here are some advantages and disadvantages of hard money lending.
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What is a Hard Money Loan?
Before we start discussing the advantages and disadvantages of hard money loans, we need to understand what they are. Basically, depending on what you want to do, the hard money loan might just be the thing that you are looking for. Hard money loans are best suited for fast flip-and-fix projects. Understanding what these loans are and how they work is crucial.
These loans are not provided by a traditional lending institution, for example, a bank. On the contrary, you can only get a hard money loan from a private lender. The main reason behind how these loans work is that the real estate that you purchase with the loan will serve as collateral. This way both you and the lender have reduced risks.
As we mentioned, hard money loans are, in most cases, used as a short-term way of getting funds as fast as possible. As an investor, it is much easier to get a hard money loan for your flip-and-fix project than it is to go to the bank and apply for a loan. Investors prefer hard money loans as they do not have as many requirements as traditional loans might.
Advantages and Disadvantages of Hard Money Loans:
Now that we have gone over the basics of how these loans work, here are the advantages and disadvantages of getting a hard money loan for your investments.
Advantages.
One of the main advantages of hard money loans is how quickly they are approved. Traditional loans cannot even compare as they take longer and are harder to get in general. As we mentioned, the sole reason behind this is that the focus of the hard money loan is the property in question serving as collateral. Your employment history or financial situation is not of great importance when you apply for a hard money loan.
This way, you will not have to worry as much about your credit history and bank information as the analysis will only be superficial. Compared to the traditional bank loan where you have a list of requirements that you need to fill in before you even get a chance to apply for a loan, hard money loans are simply a faster alternative.
Another advantage of a hard money loan is how flexible it is. As we just said, the standard process for a bank loan is long and difficult. On the other hand, hard money loans do not have the same process. They work completely different as every case is evaluated differently.
Unlike the traditional lender, who has to make sure that everything is going according to the procedure, a private lender has much more room to make decisions. The main influence is the property in question. If the lender finds the property worthwhile, you might even get a much better loan. Additionally, there are no terms that are present. Flexible terms are just another advantage of hard money loans.
Disadvantages.
Hard money real estate loans do have a lot of advantages, but like with everything else, there are some downsides. First, the interest rates of these loans are much higher compared to the more traditional ones. Additionally, you will probably have to put up a down payment equal to the part of the property value you are looking to buy.
In most cases, lenders typically ask for at least 20% of the property price. This can prove to be quite a challenge when there are more expensive properties in question. Another disadvantage of getting a hard money loan is that when the terms are set, they do not change. It is extremely hard to get an extension for a loan.
Hard money loans typically have a 12-month term. In some rare cases, these terms can go to 24 months. That being said, asking for an extension might obligate you to pay an extension fee while also increasing your monthly payments.
If you fail to meet the monthly payments, the property listed as collateral will become the owner of the lender. However, in some cases, lenders will rather work with you until the project is finished as it is more beneficial to them than to simply take the property for themselves.
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