If you’re a new house flipper, you may be overwhelmed at the prospect of funding your first property. As you see other real estate investors flipping multiple projects at once and bringing in huge profits, it can seem impossible that you’ll ever get to that point.
But the good news is that new house flippers don’t have to come up with their own cash to pay for a renovation. Getting a down payment or funding your own home renovation is difficult enough, and sometimes borrowing the money in the form of a hard money loan is the best option.
This guide to hard money loans for real estate will help you learn everything you need to know about getting funding for your next house flip.
How Do Hard Money Loans Work?
Hard money loans are also commonly known as bridge loans. They’re a short-term loan that can be used as a great tool for house flippers or real estate investors to renovate a property and quickly sell it for a profit. These loans are typically issued by private lenders instead of banks. A hard money loan is a quick and convenient alternative to a conventional mortgage.
Whereas most loans are issued depending on the applicant’s credit score, a hard money loan is issued based on the value of the property. Most lenders consider the “after-repair value” (ARV) of the home, which is an estimate of the property value after the renovation is finished.
Who Should Use Hard Money Loans?
There are many scenarios where a hard money loan is a great option. New house flippers love hard money loans because they are a way to get quick access to cash. If you don’t have a great credit score or don’t have another form of collateral, a hard money loan may be the best route for you. A hard money loan for real estate is also ideal because of the convenience and flexible terms of the loan.
Hard money loans can be issued for any type of property, including single-family residences, multi-family residences, commercial property, land, or industrial buildings. Many people choose a hard money loan if they’re working around a short sale or foreclosure.
Benefits of Hard Money Loans
Here are just a few of the benefits you’ll enjoy with this type of loan in comparison to a typical mortgage or other types of loans.
One of the biggest benefits of a hard money loan is quick access to funds. Typical mortgages take time and a lot of paperwork to process, but a hard money loan could be in your bank account within a few days, rather than a month or more. If you’re trying to score a foreclosed home or a short-sale property, this may be the best option for you.
A hard money loan is a perfect way to get the money you need when conventional mortgages aren’t an option. Because a hard money loan is based on the collateral of the property itself, you can still get a loan even with a bad credit score.
Drawbacks of Hard Money Loans
Here are some of the drawbacks to consider before determining if a hard money loan is the best option for you.
A hard money loan will likely come with higher interest rates, origination fees, closing costs, and more. Make sure you read the fine print and try to calculate how much the loan will cost you over time before you sign.
Short Repayment Period
Most hard money loans have a short repayment term. Not paying back the loan within the designated period will result in fines and paying more in interest.
How to Get a Hard Money Loan
Ready to apply for a hard money loan? The process is quite simple. First, do some research on lenders, finding one with positive reviews and reasonable terms. Then gather the required documents and fill out the application. Most hard money lenders require:
- A down payment or equity in the property
- Proof of cash reserves to pay the minimum loan payments
- Details on how you plan to repay the loan
After providing this information to your lender, the loan should be processed within a few days.
Real Estate Elevated
By following this guide, you’ll be able to determine if a hard money loan is right for you and have the information needed to get ready to apply. And if you’re looking for more real estate tips, check out about Real Estate Elevated. We offer free courses all over the country to help real estate investors of all levels learn the ropes of the business. Register for a course near you today!