Real estate investors often use hard money loans to acquire properties quickly. They are ideal for fix and flips because the short terms align with renovation timelines.
Other financing options include traditional mortgages, home equity loans and borrowing from friends or family members. Each has its pros and cons.
The lender will want to see that you have liquid reserves available to manage the project and pay back the loan. A good indicator of this is a history of successful property investments.
1. Quick Approval
A traditional mortgage loan can take months to close, but Dallas hard money loans are much quicker. That is due to the fact that they are primarily used for distressed properties and are backed by collateral.
When a hard money lender approves a borrower, they look at their credit score and debt-to-income ratio, but they also focus heavily on the property itself. Lenders will want to see the property address, comps and a contractor’s estimate of what work will be needed.
Hard money lenders will often give borrowers flexibility when it comes to the terms of their loan. Borrowers can use the proceeds of the loan for a variety of purposes, such as working capital or to purchase raw land that they plan to turn into a commercial development.
2. No Credit Checks
Unlike traditional loans that take a while to process, hard money lenders can offer funding in ten to fifteen days. This can be a big advantage when buying properties.
Hard money loans focus on the property value, not your credit. This means borrowers with bad credit are often able to qualify for this type of financing.
Banks typically have long lists of requirements for their borrowers to meet, including a good credit report and score. As a result, many borrowers are rejected for financing by banks.
However, private hard money lenders may only require a borrower to have sufficient equity in the property, adequate cash reserves for making monthly loan payments and a sound exit strategy. Compared to the countless requirements of banks, this list is short and reasonable.
3. Lower Interest Rates
Some real estate investors find that the lower interest rates offered by hard money lenders are more appealing than the high rates associated with traditional mortgage financing. They also appreciate the shorter repayment terms.
Another advantage of working with a hard money lender is that they have fewer requirements than banks do, which means your loan is more likely to be approved. They look at the property, your experience in real estate, whether you have enough cash reserves to make your monthly loan payments and a reasonable exit strategy for the property.
Shawna finds a property with issues that prevent it from qualifying for a bank loan, so she decides to use a hard money lender to buy the property and make the necessary renovations. She plans to rehab the property and then sell it for a profit.
4. Fast Closing
Hard money loans are ideal for investors who need to close quickly on a property. They can be used for home flipping, buying and rehabbing rental properties, purchasing raw land or bridging the gap between conventional financing and closing on a deal.
The hard money loan process typically begins with a pre-qualification call where the lender gathers basic information about the borrower and details about the property. Once the property passes underwriting, a hard money loan can usually be closed in as little as 30 days.
In addition to closing fast, hard money lenders offer greater flexibility than traditional banks. They can often work around unusual circumstances that may prevent a borrower from obtaining conventional financing, such as bankruptcy, probate or family court matters.
5. Flexibility
Hard money lenders are flexible when it comes to loan terms because they aren’t subject to the same regulatory requirements that conventional mortgage lenders are. This flexibility is helpful if you are looking to secure financing for a particular project, but are unable to meet the creditworthiness requirements of traditional lending institutions.
Conventional mortgage lenders rely on criteria such as income, credit score and debt-to-income ratio to determine a borrower’s ability to pay back the loan. In contrast, private lenders focus more on the value of the collateral property.
This makes it easier for investors to obtain financing for properties that might not qualify for a bank loan due to structural issues, location or other factors. This can be beneficial when investing in a fix and flip property where the investor is aiming to sell the property within a short timeframe.