Investing in real estate is a smart way of creating new wealth. And while it takes time for property to appreciate in value, the real estate market offers other ways to make fast money. A popular way of generating quick returns in real estate investments is by flipping property. If you want to fix up distressed property but don’t have the cash to do it, apply for a hard money loan. It is the easiest way to fund your property purchase so you can earn money off your investment right away. Read on to find out more…
A hard loan is a short-term facility that allows property investors to acquire properties intended for rehabilitation in the shortest time possible.
The qualification process normally takes 15 days which is fast enough to let you get in the bid with cash buyers. However, keep in mind that a hard loan is an interest-only mortgage and it will typically charge higher lending rates.
Depending on your arrangement with the hard loan facilitator, the loan is usually settled within a period of 12 months. Why? Because when you flip a property for resale or tenancy, it should only take a few months to find a buyer or a tenant.
A hard loan can also be used by investors who are in it for the long-term. They usually plan to renovate a property before they decide to go for refinancing and apply for a longer term mortgage.
Interest-Only Mortgage Benefits
While you are in the process of fixing the property, you will only be paying the amount of the interest on the loan. The principal amount can be paid once the rehabbed property has been sold.
The advantage of a hard loan is that the process of acquiring it is much easier. The requirements are fewer and the period for approval of the loan is shorter. Thus, you should expect that in lieu of these benefits, the trade-off is that you have to pay higher interest payments.
What should you expect the terms and conditions are for a hard loan? Interest rate charges would be in the neighbourhood of 7% to 12%, the loan facilitator may charge you a fee equivalent to 1% to 10% of the amount, and the term could be anywhere from 1 to 3 years.
Should You Apply For This Type Of Borrowing?
A hard money loan may not be for everyone. Lenders would grant a hard money loan to two types of borrowers:
Property flippers are those who acquire distressed properties, rehabilitate them, and sell them for profit. This is a fast-growing business and has in fact, spawned a good number of reality shows on TV!
If this is what you plan to do, then a hard loan is for you. A hard loan can be used to buy and renovate the property. The amount of the loan is calculated based on the asset’s ARV or After Repair Value. The ARV represents the asset’s fair market value once it has been fully renovated.
After you buy the property, you can draw funds from the loan facility to pay for the cost of the renovation. Think of it like receiving a credit line from a bank. The entire amount of the hard loan, including the principal, will be paid once the renovated home has been sold.
Long Term Property Investors
If you’ve come across distressed property that you believe has long-term value, you may want to apply for a hard loan. Most lenders will not approve mortgage applications if the property in question is in poor condition.
A hard loan will give you the funds necessary to fix up the property so you can qualify for a long-term mortgage loan. If the long-term mortgage loan is approved, you can use it to settle your hard loan. You also have the option to rent out the property and use the monthly rental payments to pay off your amortization.
Long-term investors prefer applying for a hard loan in situations where the distressed property has attracted a good number of cash buyers.
For the reason that the process of approving hard loan applications is faster than the typical loan facility, the long-term investor will have the necessary funds to compete with the highly- liquid cash-only buyers.
Differences Between This Type Of Loan And A Conventional Mortgage?
If you want to apply for a mortgage loan, you have to go to a bank. The amount of the mortgage is calculated according to a percentage of the home’s acquisition value. A mortgage will carry a loanable amount equivalent to 80% to 96.5% of the assessed value of the property. For the borrower, you will have to account for around 20% of the cost of the property.
In contrast, you can approach a private money lender for a hard money loan. The property’s LTV or Loan To Value or ARV is assessed and be used to calculate the amount of the hard money loan. If based on LTV, be advised that the loanable amount will be calculated to 90% of its assessed value. Thus, you will still account for 10% of the cost of the property.
When does the private money lender use LTV? It is used if the property in question is regarded to be in good condition.
As discussed earlier, ARV is the assessed value of the property after renovation works have been completed. It is used if the property is not in good condition so the investor decides to fix it up first before applying for a long-term mortgage loan.
What Are The Qualifications When Applying?
The requirements to qualify for a hard loan are standard among private money lenders. These requirements are as follows:
- You must have a Credit Score of 550+
- You should provide your Bank Statements for the last 2 to 3 months
- You should provide complete details of the property’s location and its acquisition price
- You should give a rundown of your previous experience if flipping properties
The private money lender may ask you to submit additional documents. Among these are contractor bids, a summary of your previous flipping projects, examples of purchase contracts, plus a timeline of the renovation work to be done on the property in question.
You can apply for hard loans as often as possible. There are no limits compared to mortgage loans. It is also easier to negotiate the conditions of the hard money loan.