Are you interested in buying fixer-upper properties around your hometown and turning them into stylish new homes that people want to buy? If you’ve always wanted to be like your favorite HGTV duos, then you know that you’ll need financing to make your dreams happen. Luckily, you can get closer to your goals by taking out a hard money loan.
What Is a Hard Money Loan?
Sometimes referred to as a rehab loan, a hard money loan is a type of financial help that is backed by a hard asset. Most often, this asset is property, such as a house. When the property can be used as collateral, the lender doesn’t focus on the borrower’s credit history as much, which makes it easier for some people to receive financing. Because people who provide hard money loans Los Angeles don’t often ask for income or credit history information, the loans tend to be faster to obtain.
Who Uses Hard Money Loans?
People who don’t have the best credit history or who do not have a large income often are the ones who look for financing via hard money loans. This is especially true of people who purchase old homes and flip them as investment properties. The amount of financing available is based on the value of the property as well as its expected value once it has been renovated and goes on the market. Traditional banks don’t provide this type of financing, so most hard money lenders are private companies or individuals. Borrowers typically pay the loan back within a year, although some take as long as three years. Many people use this type of lending as a financial investment and actively participate in using the loans as part of their business models.
What Are the Advantages of a Hard Money Loan?
There are several advantages to taking out financing via a hard money loan. The biggest advantage is the fact that it does not rely on the borrower’s credit history. Traditional loans via banks or other financial institutions typically rely on credit history. Someone who doesn’t have a nearly perfect score is less likely to receive financing. That isn’t a problem with a hard money loan. Since the lending is based on assets, many providers don’t even check credit scores or income history.
Getting hard money financing is also typically much faster than applying for a traditional loan. Traditional financing requires much more paperwork, not to mention the aforementioned credit and income checks. Being approved for a traditional loan can take weeks or even months, depending on how much you’re hoping to receive. On the other hand, a hard money financer looks at minimal information, which means that most borrowers receive funding within a week. Some places can even provide it on the very same day.
Finally, hard money financing is a short-term loan. Most borrowers only use the loan for the length of time that it takes to renovate and sell a property. This means that many people can repay their lenders within six months (although the average is about 18 months). Some lenders do allow the borrower to extend the life of the loan if necessary but remember to read the extension requirements before signing for the loan, especially if you’re taking on a larger-than-usual project.
What Are the Disadvantages of a Hard Money Loan?
One of the biggest downfalls of taking out a hard money loan is the higher interest rates. Since the borrower does not need to have a solid income or a high credit rating to receive the loan, the lenders who provide them often consider them high risk. Depending on the terms of your loan agreement, expect to pay 8-12% or even more in interest rates.
Hard money loans also tend to have some hidden costs. You won’t be able to receive financing without putting in some of your own money first. Expect to pay up to 20% of the loan’s amount as a down payment on the property. Every lender has its own set of fees as well. There may be an origination fee of 2% or more, an appraisal fee, and a fee for processing your paperwork. Keep in mind that you’ll also need to purchase builder’s risk insurance if you want to receive a hard money loan. At a minimum, it should cover the cost of the renovations and the appraised cost of the property, which can be as much as 4% of your project budget.
Finally, it’s important to understand that you could lose the home. If something happens that forces you to stop making payments on your loan, the lender will take the property that you put up as collateral. For this reason, try to avoid using these kinds of loans for homes that you need to live in if at all possible. When you work with a hard money lender, do your best to complete your renovations and make your loan payments within the time specified on your paperwork.
How Do You Get a Hard Money Loan?
To get a hard money loan, you must find a lender that provides them. Remember, traditional banks don’t offer this type of financing. Start by Googling for local lenders. Before you sign on with anyone, though, it is important to verify the company’s reputation. Look for and verify any financial accreditations that the lender has, plus look over its website and social media to ensure the company seems professional. Online reviews are also important for determining how happy current and former borrowers are with the company’s service.
Don’t be afraid to ask questions, either. Read the fine print before signing any contract and ask clarifying questions as needed to ensure that you understand everything correctly. Common questions include how repayment works, what happens if your project takes longer than expected, and what happens if you are late on a payment. Remember to look for any red flags as well. Reputable lenders don’t charge application fees, for example. The right lender will disclose all fees upfront and answer any questions that you have directly and concisely.
Hard money loans are an excellent way to get the financing you need for your big renovation project. Talk to a professional and reputable lender to begin the process.
