With the demand for homes at an all-time high, investing in property has become a great way to make money. If you’re looking to finance a property flip, you may have heard of a hard money loan. To help you decide if it’s the right loan for you, we’ve rounded up all the hard money loan basics.
From what they are to how to apply, we’ll go over everything you need to know about hard money loans. We’ll go over financing, different loan options, and why a hard money loan may be just what you need to finish your property flip or construction project.
What is a Hard Money Loan?
A hard money loan is a loan secured using real property as collateral. Hard money loans are most commonly used in the real estate industry. You may use a hard money loan to complete renovations, using your home as collateral. Learn more about hard money loans at https://dfw-hardmoney.com/hard-money-lenders-atlanta-georgia-loan-lender-guide/.
With a traditional loan such as a mortgage, you’re given financing based on your income, assets, and ability to pay back the loan. With a hard money loan, you’re given financing based on your collateral. This makes qualifying for a hard money loan a little easier.
Unlike with a traditional loan, however, you’ll see shorter loan terms. This works well for property investors looking to update a home and sell it quickly for a profit.
Hard Money Loans are Great for Emergencies
If you’re updating or flipping a property, you’re likely using cash or financing to complete the construction. Home construction projects don’t always go as planned. This is why having extra cash available is for an emergency is key.
Home flippers may look to use a hard money loan to complete renovation projects on their home. Instead of using their own cash, they are able to get a loan to cover the construction expenses. This way if an unforeseen expense comes up, they still have their own personal cash to cover the emergency.
Let’s say a water pipe bursts in the middle of construction. With a hard money loan, you can use this money to repair the damage. Using a hard money loan gives you more flexible options and breathing room when it comes to the unexpected.
You Can Use Loan Collateral
When you apply for a loan such as a mortgage or a construction loan, you’re getting qualified based on your income and assets. With a hard money loan, your lender is looking at the home or collateral you have. This way, if you default on your loan, the bank is able to use your home to recoup the money they lent you.
Using collateral instead of your income or assets allows you to get access to financing quicker. When you’re flipping a home, for example, you want to make your renovations and get the home sold as fast as possible.
The longer it takes you to get financing, the longer your home is sitting on the market unsold. This is where using collateral with a hard money loan can save you a ton of time. You can finish your remodel and get the home sold to pay off your loan.
Relaxed Loan Qualifications
When you apply for a traditional mortgage or personal loan, there are a lot of documents you need to show. To start, your bank will look at your previous tax returns. They will also check your credit score and your bank accounts to determine your assets.
With a traditional loan, you’re mostly getting qualified on your assets or your income. Lenders look at the amount of income you have coming in compared to the amount of debt you have. This gives them a comfortable guess as to what mortgage payment you’ll be able to afford.
With a hard money loan, the qualifications are far more relaxed. This is because your lender is looking at your home as your asset. Your lender won’t necessarily need to see income from another job to qualify you.
The relaxed loan qualifications make getting approved easier for those who don’t have a salaried job. Most property investors, for example, earn their money by selling real estate. It’s difficult to produce a paystub the same way a salaried employee can.
Shorter Loan Terms
A hard money loan is great as a short-term loan. Instead of needing to pay the loan off in 30-years, you may see a loan term of one to three years. The loan terms are shorter because the lender expects to be paid once you’ve sold your home.
One of the benefits of using a hard money loan is that once your investment property is sold, you can pay off the loan entirely. There’s no 30-year mortgage to pay with payments that stretch for decades.
Hard Money Loans Offer Flexible Payments
With a hard money loan, you’ll often find more flexible payment options. This is great for property investors whose needs change quickly. When you have more than one home in your portfolio, it’s nice to have flexible payment options.
Hard Money Loans are There When You Need Emergency Cash
When you’re renovating a home, unexpected emergencies always come up. Hard money loans are great when you need cash in a hurry. You can use a hard money loan to cover an unforeseen construction cost or emergency.
With a hard money loan, there’s no need to dip into your emergency fund. With easier qualifications and fast turn-around times, a hard money loan is great when you need money in a short amount of time.
Is a Hard Money Loan Right for You?
If you’re a property flipper, a hard money loan may be the best financing option for you. With a hard money loan, you’ll have quick access to cash to finish a renovation project or cover a construction emergency.
With lower qualification requirements and shorter loan terms, a hard money loan may be just what you need to get your construction project completed. For more real estate news and tips, check out the blog section.