When Does It Make Sense To Get a Hard Money Loan?

Your circumstances might make it difficult to qualify for traditional financing for real estate investing. However, less-than-ideal credit doesn’t have to prevent you from securing funds. Find out how hard money loans work and when using them makes sense.

What Is a Hard Money Loan?

A hard money loan is an asset-based loan that a private company or investor provides. The lender extends financing based on your collateral’s value instead of focusing on your credit score.

These loan types are common in real estate where the property can secure the loan. If you have to default, the lender can sell the property to recoup its investment.

A soft money loan refers to a traditional mortgage where the lender is usually a bank or credit union. The institution underwrites loans by considering your credit and income.

Hard money lending using comes with higher interest rates and shorter terms. However, you can usually get funding more quickly and need less documentation for approval.

What Are the Different Types of Hard Money Loan Products?

Hard money loans usually allow you to purchase investment properties. For example, you can request an acquisition loan to buy an investment property. You could also use a bridge loan to leverage other pieces of real estate you own to purchase additional properties.

Hard money construction loans can open up funds to help you develop land or demolish a building. Fix-and-flip loans are also common. The flipper can get the cash to buy the home, make repairs, and resell the house quickly for a profit.

Who Should Consider a Hard Money Loan?

A hard money loan can work well when you need short-term financing and time is of the essence. If you’re a home flipper, you likely plan on turning over the property quickly, which minimizes the interest you’ll pay. Since you need quick cash to cover renovations, you can get the money more rapidly without the work that a traditional mortgage requires.

You could even use the same strategy for rental properties. You can buy and rehab using the hard money loan and start renting it out quickly. Then you can refinance for a better rate.

Another time a hard money loan is helpful is when you need to close quickly on real estate. A hard money loan can be the solution if a regular lender, such as a bank or credit union, can’t meet your deadline for an excellent deal.

Hard money loans may not be your first choice for financing, but they can be the ideal solution for your situation. Talk to a financial professional to discover if a hard money loan is right for you.