Every serious real estate investor should know about hard money loans. When borrowing from traditional mortgage lenders isn’t a viable option, obtaining a hard money loan could be the answer.
Traditional mortgage lenders typically grant loans based on your credit score and your ability to pay the loan back. Even with the best credit score and plenty of money, getting approved can be a lengthy process – if you’re approved at all.
With a hard money loan, however, lenders are less concerned with your credit score and your ability to pay. Instead, these loans are granted on the collateral you put up to secure the loan. If for some reason, you are unable to repay the loan, the lender simply takes the collateral you put up and sells it to recoup their money. As a general rule, hard money loans are short-term loans (1-5 years), and they are usually given by private lenders or companies.
So, what are the advantages of using hard money? Here are the four biggest reasons to use hard money loans to invest in real estate.
1. Hard Money Loans are Fast and Easy
One of the main reasons hard money loans are a great financial tool for real estate investors is because they are approved and funded much faster than traditional mortgage loans. All that’s usually required to apply for a hard money loan is a simple loan application, that in many cases, the lender will conditionally approve in less than five minutes.
Compare this to the multitude of pages a borrower must fill out and the weeks of waiting for an approval and then funding with a typical mortgage lender. The property you’re hoping to buy could be snatched up by someone else in that time.
2. Hard Money Loan Offers are Stronger and More Reliable
If the property you’re hoping to invest in has multiple bidders with conventional loan backing, your hard money loan offer will stand out amongst the crowd. Conventional lenders have a reputation of pulling their funding for no good reason during escrow, but hard money lenders aren’t known for being so wishy-washy. No matter how many investors are looking to buy the same property, those with hard money backing will be given stronger consideration than those with conventional loan backing.
3. Hard Money Loans Give You Leeway to Negotiate a Lower Purchase Price
All-cash offers aren’t the only offers that allow you to negotiate a lower purchase price. When you have hard money backing, you have more leeway to get a lower price because of the promise of a shorter loan period and quick close associated with this type of loan. If you’re dealing with a motivated seller, closing quickly may be the key to clinching the sale at a lower price.
4. Hard Money Loans Free Up Cash
Investors who buy properties with cash rather than securing loans enjoy several benefits such as higher offer acceptance and lower purchase prices. However, this option ties up most of an investor’s capital and makes it difficult for him to take advantage of good deals quickly.
Using a hard cash loan allows you to snap up those good deals when they arise without having to worry about finding the money to do so. The cash you have remains available for other projects.
If you’re a real estate investor, it pays to know all the options available to you when it comes to financing. Hard money loans are valuable financial tools that come in handy when conventional loans aren’t a viable option.