Opt for a hard money loan if you’re looking for a quick financing solution to flip a property for cash. It’s no secret that house flipping can be a lucrative venture for experienced investors planning for retirement or newbies looking to break into the real estate space. If you have the know-how to significantly improve a property’s value without breaking the bank, you can even flip up to four houses a year and make a tidy profit.
However, many investors often struggle to get funds to purchase the property and make the necessary cosmetic changes within their expected timeline. That’s why you can and should fall back on a hard money loan, as this financing solution can be a lifesaver when you need extra capital to close a bid or complete your renovations. So stick around till the end to learn the nitty-gritty of how and when you can leverage hard money loans, and why it might be a better option than a traditional loan for you.
Contents
How do Hard Money Loans Differ from Traditional Mortgages
Eligibility Requirements:
Worry less about your credit score when you choose a hard money loan. Maryland Hard Money Lenders understand that building a good credit standing can take time, which is why they focus more on the property’s value. In other words, most hard money loans operate based on collateral, where you agree to forfeit the property ownership if you can’t repay. Most lenders rarely have to exercise this clause as most borrowers have a good exit strategy even though it provides a quick way to secure funding. In comparison, having a poor credit history can be a major blocker to securing a traditional mortgage, because banks prefer borrowers with a solid credit score, steady income, and low debt-to-income ratio.
Approval Processes:
Beat the competition in securing time-sensitive property opportunities by skipping the long approval process of traditional loans. Conventional mortgages involve a lot of bureaucracy to fact-check your income statement and credit score, as a result, the average approval time can be as long as 6 whole weeks. This timeline may not be the most convenient when you have a seller looking to offload a high-value distressed property within the month.
Hard money loans are also known to have a shorter processing time which may only take a few days to complete. As long as the hard money lender sees value in using the property as collateral, they can overlook the other formalities and fast-track your approval. Within days you can easily get funding and buy a house within a week of submitting your application.
Repayment Terms:
Buy, flip, and sell your property within your loan’s time frame. Hard money loans are more suited to fix and flip projects because of their short-time nature, often lasting between 6 months to 3 years. In other words, there’s no need for you to apply for a traditional loan that gives borrowers up to 15 years to repay when you need less than 12 months to complete your purchase and renovation.
Aside from that, banks often charge penalties on early loan repayments, meaning you’d either have to pay those fees or spend several paying it off plus interest, long after you’ve completed your house flipping project.
What Stages of Fix and Flip Projects Can Hard Money Loans Be Utilized?
Purchasing the Property:
Get the necessary capital to purchase your dream property through a hard money loan. Traditional lenders like banks and other conventional institutions often place restrictions on the type of property you can buy. Since these financiers are more risk averse, they’re less likely to approve when you want to acquire a significantly distressed or undervalued property, no matter how good the ROI might seem post-renovation. And even when they are ready to finance you, the process can be long and tedious, increasing your chances of losing out on time-sensitive opportunities.
On the other hand, hard money lenders care more about profit. It is important to plan a well-thought-out exit strategy to most likely get a yes to fund even the most dilapidated building on the block. Also, different types of hard money loans can be used such as construction and bridge loans to purchase a property quickly and with less hassle.
Covering Renovation Costs:
Max out your property’s ROI by using a hard money loan to cover your remodeling costs. If you want to get the most out of flipping your property, then you have to invest in the right renovation projects. However, installing new cabinets or changing your home’s flooring can be expensive. After buying a house, most investors are low on funds and often try to keep their cosmetic changes to the bare minimum, which barely increases their profits.
So if you want to break even after considering your closing and holding costs, you have to go all out with your upgrades. It would be wise to consider using a hard money loan to reduce the out-of-pocket costs of your repairs and upgrades, boosting your property value, and maximizing your returns.
Bridging Financing:
Use hard money loans to prevent a gap in your financing after your renovations are complete. It takes time to sell a house, and during that period you have to foot the holding costs including utilities, property taxes, and mortgage repayments. As a result, without proper planning, you could easily run into a deficit that forces you to sell your recently flipped property at a loss. The good thing is that hard money loans offer a solution to finance your property till you’re ready to sell or refinance. Aside from that, it also gives you more flexibility to take on multiple projects and transition smoothly from remodeling to holding.
How To Choose a Hard Money Lender for a Fix and Flip Project?
Check the Lender’s Reputation:
Eliminate problematic lenders from your list of options by checking their reputation. Unless you already have a trustworthy contact, you’re most likely going to start your search for a hard money lender online, so don’t do a half-baked job. Beyond knowing the lenders in your area, look for positive reviews that showcase their successful lending history, and negative feedback that could show you potential red flags to avoid.
Ask about the Lender’s Requirements:
Determine if the lender’s requirements meet your needs and convenience. While most hard money lenders tend to operate with the same playbook, there are still minor discrepancies that could affect the success of your fix-and-flip business. Before signing a deal with a lender, ask about their policies on down payment – do they require that you make a significant personal investment for houses over a certain figure, or are they willing to front your purchase when the project offers great prospects? Some lenders may also place restrictions on who can borrow from them by giving beginners higher interest rates.
Compare Loan Terms and Costs:
Research to find the best loan deals within your local market and have enough time to decide before jumping into an agreement as you could lose out on other loan offers at a possibly lower interest rate. While hard money loans tend to charge higher interest rates than traditional loans, some lenders can depend on as much as 18% while others cap their rates as 10%. As a result, it’s not enough to settle for the first lender that offers you a great deal.
Aside from the interest rate, it’s also essential to review other terms to get a full picture of your overall expenses. Closing fees and penalties can also affect the total loan cost, so ensure you compare offers to get the most favorable deal.
Inquire about their Experience:
Look for lenders that have a proven track record of hard money lending. Just like how lenders evaluate how much experience you have in flipping houses, you also need to assess their investment records. Generally, reputable lenders with a long history of financing investors in house flipping projects make the approval process faster and can help you out with any challenges along the way. On the other hand, if a lender has little experience with real estate in your area, or flipping your type of property, they could have unrealistic expectations of what it takes to complete such projects and be more difficult during the negotiation process.
Conclusion
Complete your house flips with more ease by opting for a hard money loan. Rather than traditional loans that have strict entry requirements, hard money lenders prioritize property value over your credit score. As a result, they can guarantee you faster approval times on better times if you know how to negotiate. This advantage allows you to seize great real estate opportunities, so you never have to worry about funding when you find a valuable property at a steal.
Even if you’ve already purchased the property, you can always apply for a hard money loan to cover the costs of renovation. Most lenders don’t charge penalty fees, so you can repay early after completing your remodeling and selling the house. Review their requirements and reviews to find out if they have a trustworthy reputation and experience funding flipping projects for more leverage in your investment goals.
