If you are a real estate investor looking to start a new project, it is helpful to understand the benefits of hard money loans for financing. In this article, we discuss the 21 benefits of hard money loans to help determine if this loan type is right for you.
Benefit #1: Convenience
Applying for a hard money loan is much more convenient than getting a mortgage. Closing on a mortgage loan can cost significant time. Hard money loans are quicker since they don’t need as much documentation for approval like traditional mortgage lenders.
Benefit #2: Easy Approval, Fewer Barriers
With a hard money loan, you can avoid waiting on traditional lenders to review your application, check your credit score and history, verify your income, and review your bank statements. After submitting all the necessary documents, you can often secure a hard money loan pre-approval within one or two days.
Hard money lenders focus on the collateral you provide and whether the asset has good market value. If the value of your asset is greater than the loan amount plus interest, you can get a hard money loan fairly quickly.
Benefit #3: Quick Closing
Banks can pull financing from a buyer during escrow, which can jeopardize the success of a deal. Hard money lenders will rarely pull funding for arbitrary reasons.
Therefore, hard money loans are a more reliable source for quick financing. If you are trying to buy a property with many competing bids, a hard money loan with a quick close will help seal the deal quickly.
Benefit #4: Ability to Negotiate a Lower Purchase Price
Hard money loans offer a shorter escrow period and a quick close. Real estate investors may be able to negotiate a lower purchase price from motivated sellers who are looking to close on a sale as quickly as possible.
Benefit #5: Not Credit-Dependent
Hard money lenders are much more flexible than traditional lenders when approving loans. A traditional bank will always consider the borrower’s credit and income.
Hard money lenders primarily focus on the value of the collateral asset(s) you have to offer. If they are satisfied with the valuation and marketability of the asset, they will likely provide approve your loan quickly.
Benefit #6: Leverage
Real estate investors who buy with cash often benefit with better purchase prices. But, if your funds are tied up in other projects, you may be limited in the amount or size of deals you can do at any given time.
Hard money loans offer you leverage in this scenario. They allow you to finance up to 75% LTV (loan-to-value) — or even higher on certain occasions — and you can put up your other properties as collateral.
Benefit 7: Available for Risky Borrowers
Banks may deny borrowers a loan if they have a bad credit history, such as a bankruptcy, loan modifications, or foreclosure. This makes traditional mortgage financing inaccessible, even if the deal has economic potential.
Hard money loan lenders look past these types of credit issues since they are asset-based lenders. If your down payment and the property value meets their expectations, you will likely receive a hard money loan.
Benefit #8: No Borrowing Limits = More Properties
While banks often cap the amount of credit they will give to a single borrower, hard money lenders have more flexibility. Hard money lenders can finance projects without limiting the number of loans they can offer to a single borrower.
Benefit #9: Flexible Terms and Conditions
It may be hard for borrowers to obtain unique terms or loan payment structures from conventional bank lenders. Hard money lenders, however, can be more flexible to work with you and find a solution that satisfies your specific cash flow needs.
Benefit #10: Free Real Estate Advice
Hard money lenders and real estate investors work together in partnership. Both parties want the project to succeed and to go smoothly. The lender wants payments to be made on time and you want to complete the project and reap the expected profits.
Reliable and experienced hard money lenders will give their honest opinion and feedback on any potential problems that may arise from a deal. Having experienced advice will help you succed, particularly if you are inexperienced.
Benefit #11: No Prepayment Penalties
Conventional lenders, like banks, may penalize you for paying off your loan before its maturity date. Hard money lenders, however, do not charge prepayment penalties and will accept your payment before the due date.
Benefit #12: Close More Real Estate Deals
Hard money lenders make the loan approval process much faster than traditional bank financing options. With fast access to capital, you can close more deals and avoid losing investment opportunities.
Benefit #13: Fix & Flip Loan Within One Year
If you are a flipper and planning to fix-and-flip a property within one year from purchase, a loan with shorter term period is more likely to suit your needs. With a hard money loan, you will generally aim to repay the lender within six months to one year.
Benefit #14: Build, Sell and Pay Off the Loan
According to Realtor.com, contractors will often take out hard money loans to finance their projects. If you are a builder, you can use hard money loans to buy a lot and build on it, then sell the real estate and pay off your loan.
With traditional lenders you will face much longer wait times to get approval and receive financing. This extra time means you might miss the window of opportunity if the market turns down while you’re still building.
Benefit #15: Establish Valuable Relationships
Once you find a reliable and experienced hard money lender, developing and maintaining a mutually beneficial relationship will provide potentially profitable opportunities for years to come. With an established lender relationship the loan process becomes faster, which means you can close more deals quickly and get more beneficial terms.
Benefit #16: Financing for Projects that Can’t be Financed Elsewhere
Conventional lenders are not interested in financing short-term projects like a fix-and-flip. Banks would rather have repayment plans that make small interest amounts over a lengthy period.
If you are a real estate flipper, you generally won’t need a loan that lasts more than 12 months. This disqualifies you from owner-occupied loans, HUD loans and other beneficial financing sources.
Banks are also extremely risk-averse lenders. They may not consider loaning against a property with many issues.
Hard money lenders have flexible terms to match the financing needs of fix-and-flip borrowers.
Benefit #17: Interest-Only Loans
Many borrowers find higher interest rates a negative aspect of a hard money loan. But, hard money lenders will often do interest-only payments for the term of the loan. This means that you will have more cash in your pocket to finish your project and sell at a profit.
Benefit #18: Flexible Collateral
Hard money lenders are flexible when it comes to the collateral you can put up to secure the loan. The property you plan to purchase is always used as collateral.
However, if you have multiple properties, you can cross-collateralize. This allows for larger loan amounts and the ability to take out multiple loans for other deals.
Other types of collateral a hard money lender will consider include: classic cars, art, marketable securities, life insurance policies, annuities, etc.
Benefit #19: Improved Buy and Sell Flexibility
Traditional bank loans will not give you the freedom to invest the money you borrow in a property other than one you were approved for.
Hard money loans, however, can provide flexibility to invest in additional properties beyond the one you were initially financed for. A lender will often package multiple properties into a single loan, and may be willing to add loans to the package.
Benefit #20: Referrals from Hard Money Lenders
Hard money lenders may not just finance your next project but can often refer you to new property deals. They have many relationships with real estate lenders, construction contractors, rehabbers, and wholesalers that can present profitable future opportunities for you.
Benefit #21: Loan Extension – If Absolutely Necessary
Hard money lenders secure the loan with a lien on the property you plan to buy. If you default on your loan payments, a lender would generally foreclose on the property.
However, in certain circumstances the lender will extend, roll over or add onto the loan. This typically occurs with a higher interest rate and more fees. But it will allow you to finish your project and pay off the loans as soon as possible.
Summary
If you’re looking for fast financing for a real estate deal, these benefits of hard money loans will help you move ahead faster toward your profit goals.