When it comes to real estate financing, hard money loans have their fair share of critics. Many point to the higher interest rates as a reason to avoid this alternative form of financing, whether for a standard loan or a bridge loan. But here's the twist – numerous investors actually prefer hard money over traditional options. What makes hard money worth the extra cost? Let's dive into the advantages.
Unlocking Opportunity: The World of Hard Money
Not everyone is a big fan of hard money loans for real estate. Whether it is a standard loan or a bridge loan, hard money critics often cite higher-than-average interest rates as the number one reason for avoiding this form of alternative financing. And yet, plenty of investors consider hard money their preferred financing solution. Why?
What does hard money offer that can justify higher interest rates?
According to Actium Partners in Salt Lake City, UT, it is not just one thing. Alternative private lending has a lot to offer, especially when it comes to hard money for real estate transactions.
Plenty of Stones Unturned
You have undoubtedly heard the phrase, ‘leave no stone unturned.’ Banks take it to heart in their efforts to verify a borrower’s creditworthiness. They have to. Banks can leave no stone unturned because federal and state laws require them to look into every last detail of a borrower’s financial life. Hard money lenders are under no such obligations.
As private lenders, they have the freedom to structure their underwriting processes in any way they see fit. In almost every case, they leave plenty of stones unturned. They do not need to know every last detail of a borrower’s financial history because the collateral they require provides enough security.
This is big for property investors, many of whom do not have traditional W-2 income they can verify through pay stubs and tax records. They make their money through capital gains. Not having to produce income verification documentation is something investors are willing to pay higher interest rates for.
Loans Are Closed Faster
As hard money lenders don’t need to turn over every stone to prove a borrower’s creditworthiness, their underwriting processes tend to be substantially less complicated. They are also much faster. This is another big plus investors are willing to pay extra for.
How much faster can hard money and bridge loans be funded?
A couple of days is about average. Actium Partners has been known to fund loans in is little as 24 hours, when necessary. When the only thing they need to do prior to approval is appraise the asset being acquired, it doesn’t take long. Loan documents can be prepared as soon as the appraisal comes through. The documents can be sent to a title company, along with funding, in a matter of hours.
Property investors love the speed at which hard money works because it helps them close deals faster. This makes an enormous difference. In the real estate investing game, sellers don’t like to prolong closing for extended periods of time. The longer closing is extended, the greater the chances that a deal will be scuttled. So they want fast. So do investors. Hard money delivers.
Loan Terms Are Shorter
One last thing to consider about hard money for real estate is that loans are short term. How short? As a general rule, no longer than 36 months. Two years or less is usually preferred. Such a short term helps investors by freeing up cash for additional investments. Not being tied into a 30-year note means not having to dedicate a certain amount of cash to monthly payments for so long. It is something they are willing to pay higher rates for.
Conclusion
Conventional wisdom says that hard money loans are a last resort for borrowers who cannot fund their needs any other way. But don't tell that to the legions of property investors who prefer hard money over every other financing option. They love it so much they are willing to pay higher interest rates to get it.
FAQs
1. What exactly is a hard money loan?
A hard money loan is a form of real estate financing provided by private lenders. These loans are typically short-term and come with higher interest rates.
2. How do hard money loans benefit property investors?
Hard money loans offer faster approval and funding, flexibility in underwriting, and the ability to secure financing without traditional income verification.
3. Are there downsides to hard money loans?
Yes, the higher interest rates associated with hard money loans can be a drawback for some borrowers.
4. What is the typical repayment period for hard money loans?
Hard money loans are generally short-term, often lasting no longer than 36 months, with two years or less being a preferred term.
5. When should investors consider hard money loans?
Investors should consider hard money loans when they need quick financing for real estate deals and are willing to pay slightly higher interest rates for the speed and flexibility offered.
