If you are in the real estate industry, then the term hard money loan won’t be strange. If you are not familiar with the term, a hard money loan is a short-term loan with a high-interest rate obtained from private investors or lending houses. This type of loan is suitable for certain situations, which we will briefly discuss in this article.
Difference Between Hard Money Loan And Traditional Mortgage Loan
Traditional mortgage loans typically have long terms ranging from 10 to 30 years, have an interest rate between 2-4%, and are usually provided by banks. Hard Money Loans are short-term loans ranging from under a year to up to 5 years. They typically carry an interest rate of 7% to 10%, with the percentage based on the experience of the estate flipper.
Banks conduct detailed research on the credit history of the proposed borrower to determine if the person is creditworthy and able to pay back the loans. Hard loans don’t need to conduct detailed research but back their loan with the borrower’s property. While banks require you to make a down payment of at least 20%, private investors who give out short-term loans need about 10%.
Who Needs Hard Money Loans?
Differences exist between mortgage loans and hard money loans because they serve different purposes. While mortgage loans suit homeowners who will keep the house, short-term hard money loans are for people interested in fix-and-flip deals, rehab deals, and any other purchase that requires quick access to cash. This immediate access to liquid cash is attractive to people who fix and flip in the state of Houston, where family homes are going fast. The professionals at Houston hard money loans advise that you invest in family-size houses because you get your ROI quickly. A quick ROI for a borrower means they can redo the process multiple times, making more money. This process is re-doable because it takes 7 to 14 working days to disperse a bridge loan compared to mortgage credits which need 30-45 days to access cash.
Another reason you may need this kind of credit is its flexibility. The terms are not as rigid as the loans from the banks. Lenders cut you some slack in terms of your credit score and interest rate.
The Downside of Hard Money Loan
We have established that bridge loans are good in some particular scenarios, such as where there is a need for quick access to cash, flexibility, lower down payment, and shorter tenor. There are also some drawbacks you should know if you intend to go for this type of loan. The downsides are:
- If you don’t finish refurbishing the house on time to sell, an extended time will mean you pay more interest.
- You will require Builders Risk Insurance, which is more expensive when compared to the property and casualty insurance you would need to get if you were to take a mortgage.
- The lender holds the property deed the borrower puts as collateral. In the event the borrower cannot pay the loan, they walk out of the deal empty-handed.
- There are additional fees like a loan origination fee and closing costs.
Taking hard loans to flip houses is a decision you should take your time with and not rush into. If you choose to go ahead, make sure you investigate the private investor or funding house because many of them prey on new and naïve home flippers. Investigate, ask around and compare with other rates to make sure they’re competitive.
