The average sales price for purchasing a home in 2019 was around $299,000. A lot of real-estate investors would be hard-pressed to pay for this out-of-pocket, and with a recession battering down people’s wallets further the task grows even more impossible.
There does exist a special type of loan (the hard money loan) that can help you with these sorts of purchases, however. But what is a hard money loan, and how can it help you?
Well, you’ve come to the right place. We’re here to give you a step-by-step guide to how hard money loans work!
So are you ready? Then let’s go!
What Is a Hard Money Loan?
A hard money loan is a loan that a lender gives with the backing of a tangible thing (like a house) that will recoup the profit for the said lender. This loan is most popular with real estate investors who want to nab a property before other investors grab it by offering a bigger sum of money than they do.
One of the key differences between hard loans and traditional loans is that hard money loans are funded by private lenders rather than banks. In Minnesota, these loans offer a flexible financing option that isn’t bound by typical government regulations. This means your credit rating and other elements of your financial history may have little impact on your eligibility—making hard money a valuable solution for investors who need fast, asset-based lending.
This makes these loans popular with people suffering from a bad credit score as well. That said, these loans need to tie to something that generates profit, so using a hard loan to buy a house for yourself is not going to work.
How Hard Money Loans Work: Taking It Step by Step
So now that you know what hard money loans are, let’s break down the process of how they work and how you would go about obtaining one.
1. Know the Pros and Cons
One of the tricky things about hard money loans not having federal regulations is that it’s impossible to say what your exact hard loan experience will entail. It will come down to whatever deal you and the lender agree upon more than it will a traditional set of rules.
That said, there are some constants within the hard loan process. One is the speed at which hard loans operate. The good news is that getting these loans is fast. This is because private lenders have to go through fewer legal restrictions on their loans and can get the money to you faster.
If you want an approximate scale, private lenders get you the money in a couple of weeks at max, days at minimum. Banks (on the other hand) take months.
The downside to that level of speed is that you have to pay that loan back in about 6 months. Contrast this with banks, who give you a chance to pay the loan in installments over years and years.
Know the Pros and Cons: Part 2
Another caveat to the speed of hard loans is that they boast a higher interest rate (in general) than their bank counterparts. This is because these loans have such a short pay-back date, but will catch you off guard if you’re not careful.
That said, a pro of hard money loans is that you can take out bigger loans than the bank would let you since private money lenders tend to ask for a smaller portion of the loan paid upfront (or no portion) than banks will.
Keep in mind that the lenders will charge higher interest rates based on how much of a loan they are providing to you. So, a lender that gives you 90% of the total value as a loan will charge way more interest than someone who gave you 70% of the total value.
They supplement this with an origination fee, a lump sum paid at the start to “insure” the lender. As a result of this risk incurred by the lender, the origination fees for hard loans are greater than those done by banks.
The final upside of hard loans comes with where the financial liability lies. Except for the initial payment, most of the value ties into the property. Thus, hard loans put you at low personal risk in terms of your finances.
2. Find a Hard Money Lender
If you’ve decided that hard money loans are for you, you’ll next need to find a lender. There are certain private corporate hard money lenders you can go to for such a loan, or you can track down individuals who participate in these transactions.
Once you find the lender you’re looking for, you’ll have to negotiate the terms of the loan. Do your research and make sure you have a concrete plan for paying the loan back.
If you fail to pay the loan, the lender claims the property and keeps any payments you’ve given them so far. They can also blackball you with other private lenders, preventing you from getting any more hard loans in the area.
It’s also important to keep in mind exactly what the hard loan is there to pay for. In terms of real estate, the loan is there to cover the price of the property and refurbishing it to a modest state. So any renovations that don’t buff the base value of the property (like adding a custom statue to the garden or building a personal theater) will get smacked down like the hand of God by your lender.
Get Your Good Suit
So now that you know how hard money loans work and the steps to take to get one, you’re ready to dress up nice and get that loan to make your dreams come true! And hey, if you need more info about the world of finance and how to stay ahead, check out some of the other posts on our blog!
So good luck out there! Now if you’ll excuse us, we need to go see a hard money lender about flipping this sweet mansion we found…
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