Real estate investors know how financing a project can go two ways – traditional bank loans or hard money loans. Many investors utilize the latter to finance real estate projects and make the most of all the advantages a private loan offers.
If you’re new to this alternative type of borrowing, you should first learn all about the benefits of asking private money lenders for hard money loans.
What Is a Hard Money Loan?
Hard money loans, or private money loans, are funds available from private lenders. A lender can be an individual, a company, or an organization.
The borrower’s intention when asking for a hard money loan is to buy a property, fix it, and sell it. In a new construction case, the investor wants to build a new object and then use it for rentals or put it up for sale. They need the funds quickly and without a lot of fuss.
We all know traditional loans take a long time to get approved and require lengthy documentation to apply. However, hard money loans allow investors to apply quicker and borrow more funds under significantly shorter terms.
Time is critical for real estate investors, and being able to get funds quickly and close a deal before the seller receives a better offer is of the essence for success.
While hard money loans come in many varieties, they all share several characteristics:
- They are short term (six months to two years)
- They are most commonly used for residential properties and commercial real estate
- They are perfect for flix and flops
Benefits of Hard Money Loans
Private loans offer several significant advantages over traditional loans, and we’ll list the most prominent ones.
1. Private Money Lenders Say Yes When Banks Say No
Getting funds from traditional lenders such as banks and nationalized firms is one of the biggest challenges for every real estate investor. There are several reasons for that, starting with a complicated, lengthy application process during which the lender checks the borrower’s income and credit score. Then, the lender decides the amount they’re willing to fund, usually based on the property’s value.
If anything goes wrong during the procedure, the traditional lender strictly says no, and investors risk losing an entire month just to get rejected.
Things are much different with hard money lenders. Although they too hold the property as collateral, they don’t consider the investor’s income or credit score. All they care about is lending a loan amount that matches the property value.
2. Less Hassle in the Application Process
While low-interest bank rates may be alluring, the mandatory requirements such as complete income documentation, tax returns, leases, and bank statements can be extremely draining.
Real estate investors often can’t afford to go through such lengthy processes which is why they often choose hard money loans. The interest rate may be higher, but they will go through the application process within hours and avoid all the hassle of collecting numerous documents.
3. Fast Approval and Funding
The average bank usually takes around 30 days to approve a loan. With property value fluctuating every week, 30 days is too long a period to wait. Hard money loans give investors the ability to get their funds within several days. It enables them to compete for properties and close deals with sellers before the competition reaches them.
This benefit is essential for investors because it gives them the freedom to look out for new properties knowing they can get the funds to purchase them within days.
What happens if a real estate investor takes a traditional loan for one property and then finds another profitable deal in the middle of the term? They won’t be able to buy the new estate until they sell the previous one or fully repay their loan.
Unlike banks, hard money lenders provide flexibility allowing investors to buy new properties even if they are already engaged in another property loan. If the new estate is worth a loan, many private lenders will approve it.
5. You Can Borrow More
When you ask for a traditional mortgage, the bank usually requires a minimum of five percent down payment. If you want better loan terms, banks will ask you to put down 20% of the purchase price. However, if you put less than 20%, you usually need to buy insurance, which increases your monthly payments.
A hard money lender will usually be willing to lend you the entire amount of the purchase price. And all of it without any down payment.
While hard money loans may not be for everyone, for a specific group of people, they are ideal. If you’re looking for a fast closing, low rates, low payments, and no prepayment penalty, contact RBI Mortgages hard money lenders so we can help you close any deal.