When investing in real estate, getting the capital you need to flip or buy rental properties can be challenging, especially if you need a quick closing, aggressive leverage, funds for renovations, or have a less-than-desirable credit score. Fortunately for borrowers who find themselves in these situations, a hard money loan might be the solution you are looking for. Whether you are a new or experienced borrower, it’s important to consider the pros and cons of hard money loans when deciding if this option is right for you!
A hard money loan is a short-term value-based loan, meaning that the terms of loan approval are based on the after-repair value of the property which can often lead to 100% financing. Hard money loans can be used to fund the cost of repairing a commercial or residential property by utilizing a licensed appraiser to evaluate the ARV (After-Repair Value) of the property and determine the amount of the loan. This type of loan can be commonly used in the following scenarios:
Making the decision to apply for a hard money loan takes careful consideration. At Noble Mortgage, we’re here to help you every step of the way. From determining if our hard money loan programs are a good fit for your next fix and flip project to guiding you through our application process. Hard money loans have several benefits, including:
Quick turnaround
Hard money loans allow borrowers quicker access to capital with many loans taking just days to close. Our hard money loans can close as quickly as a few days for residential properties and 15 days for commercial properties.
Aggressive leverage
Because we are basing our loan on the after-repair value (ARV) many investors are able to obtain 100% financing which can include the purchase, repairs, and even closing costs.
Less rigorous underwriting process
The process of underwriting is simple and only requires the lender to review the property itself, a credit report, and documents to support liquid assets. Due to the reduced prioritization of a borrower’s credit and finances in hard money loans, the underwriting process can be less thorough.
Flexible loan terms
Since hard money loans are provided by private lenders, hard money lenders do not have to follow the same restrictions that traditional lenders do, opening opportunities for borrowers with less than favorable credit scores and financial situations.
Risks of Hard Money Loans
When deciding whether a hard money loan is a good option for you, it is important to assess the risks you take as a borrower, come up with a solid repayment plan, and be sure you are committed to the property you are investing in. A few risks to consider:
Higher interest rates
Due to the increase in risk for lenders, hard money loans typically have higher interest rates than other loan types.
Shorter-term loans
Since longer-term loans assume more risk for lenders, hard money loans typically have 6-month to 12-month terms while traditional loans may have terms upwards of 15 years.
Risk of collateral loss
Since hard money loans are secured by collateral, borrowers face the risk of losing their assets if they fail to repay the loan. Borrowers must have a viable plan to ensure loan repayment and avoid the potential loss of their property.
Watch our video, “Are hard money loans safe”, for more information.
Alternatives to Hard Money Loans
If you are uncomfortable with the risks associated with hard money loans, are unable to repay the loan in the shortened term, or have the financial status to qualify for more traditional loans, there are a few other options for borrowers:
Traditional mortgages
Private loans from family, friends, or another private lender.
If you find that hard money may be a good option for you, here’s how you can get started with your hard money loan.
Pick a trusted hard money lender
Finding a trusted private hard money lender is important to make sure you’re able to fund your investment successfully and quickly. Look for a lender like Noble Mortgage, with a five-star reputation for timely and competitive lending. Read our five-point guarantee to learn more.
Make a plan for repayment and exit strategy
Make sure you gather any necessary documents and map out your repayment plan to ensure you minimize risking collateral in your investment.
Hard money loans offer borrowers an alternative source of financing when traditional lending options are not viable, but there are some pros and cons. While they provide greater opportunity for certain borrowers, speed, leverage, and flexibility, they also come with higher interest rates, shorter loan terms, and potential collateral risks. It is crucial for borrowers to carefully assess their financial situation, evaluate the terms and costs, and consider the potential returns on their investment before opting for a hard money loan.
If you’re interested in getting started on a hard money loan today, contact our Houston or Dallas office to speak with a loan officer or fill out the contact form below.
