Hard money loans refer to financing provided by non-institutional lenders. There are many hard money lenders who offer fast funding at attractive interest rates.
As the borrower, you'll need to perform a thorough check on the lender's reputation and business, but as you do your research you'll find that hard money lenders can provide a great advantage in your quest to fund your real estate investment project.
Benefits of Hard Money Loans
- Faster Approvals: Without a doubt, one of the major benefits of a hard money loan is the fact that investors can secure the pre-approval within one or two days, given they have submitted the handful of documents that the lender has requested. Hard money lenders primarily focus on whether the asset itself has good market value and that borrower equity is at least 20%. Financing can take place in less than a week, as compared to normal loans which may take a month or even more. When inquiring about hard money lenders, a key question to ask is how quickly they can fund.
- Flexible Payments: With a private lender, you will have more freedom to create a customized repayment plan. With a big financial institution, you won't have this freedom. Instead, you will have to accept the payment terms set by the bank. However, with a private lender, you can discuss and come to a mutually agreeable repayment plan that you think is suitable for you.
- Fewer Requirements: When applying for a loan from a normal financial institution, you will be expected to meet many hard-set requirements, like income history, experience, etc. It is no secret that bank approvals can become a cumbersome process. It is likely that you will not be burdened with so many requirements by a hard money lender. As long as you have a high-value asset with at least 20% equity stake in it, there are good chances that you will qualify for the loan.
- Zero Prepayment Penalties: If you obtain a loan from an established bank, you may be subjected to prepayment penalties if you pay off the loan prior to the maturation date. Most fix and flip lenders do not charge prepayment penalties, so if you come across extra cash and decide to pay off your loan before the due date, you can confidently do so without having to worry about being penalized for it.
- Credit History Not a Big Issue: In the case of big lending institutions, your credit history can have a huge impact on whether you will get a loan or not. With private lenders, less emphasis is placed on a weak credit history. This is because of a private lender bases loan approval on property value, borrower equity, etc. As long as you meet these criteria, you stand a good chance of getting funded.
An added bonus of obtaining a loan from a hard money lender is that as more properties are renovated in the community, property values a slated to rise and the quality of the neighborhood improves.