Hard money loans aren’t for everyone, but they might make sense here.
- Hard money loans are typically short-term financing products designed for real estate investments.
- Eligibility is often easier than a traditional mortgage loan, but hard money loans don’t make sense for everyone.
When it comes to financing your real estate investment, you have several options. In some cases, traditional mortgage from the bank. For example, the Fannie Mae and Freddie Mac standards allow investment real estate loans. There are asset-based loans specifically designed for properties that generate rental income. Alternatively, many investors use their existing home equity to fund part or part of their real estate investment.
Hard money loans are another option, especially when other financing methods are impractical or unavailable. These loans are certainly not without their drawbacks. They generally have short loan terms and high interest rates and fees. They also tend to require a higher down payment than traditional mortgages. But it makes sense in some cases.
1. Correction and reversal funding needed
By far, the biggest use case for hard money loans is home resale. You can’t use a traditional mortgage when you’re flipping a house, especially if you’re looking to cover renovation costs, and using cash to fund the entire project isn’t always practical. No. For these reasons, the short-term nature of hard money loans can make them excellent financial tools.
2. Need bridge financing for long-term funding
Let’s say you want to buy a currently uninhabitable triplex, renovate it down to the studs, and create a beautiful, cash-flow rental property. In such cases, the bank may be reluctant to issue a mortgage in the condition of the property.
As long as the numbers still hold up this could be a great situation for a hard money loan. refinancing Get a traditional mortgage and keep it as a rental property.
3. Need money fast
If you’ve been through the mortgage process before, you know that approval and financing aren’t exactly overnight. It takes more than a month. In contrast, hard money loans can often be made in just a few days.
Therefore, even if it is an investment property that is planned to be held for the purpose of long-term rental investment, can You can qualify for a traditional mortgage in no time, but you need to be able to close quickly for whatever reason.Hard money loans can be a good short-term solution.
That said, it’s usually not economical to have more debt than you need. Interest rates on these loans typically range from 10% to 18%, so funding costs can quickly get out of hand. Keep this in mind if you end up using a hard money loan to pay it off quickly.
4. You are buying commercial property
Another common use case for hard money loans is investing in commercial real estate such as office buildings, retail premises, or multi-family homes of 5 or more units. If you are a new investor, it can be difficult to get approval for traditional commercial financing, and hard money loans used for unique properties are also common.
Hard money loan conclusion
Hard money loans can be a valuable financial tool for real estate investors, but they are not suitable for all situations. These are generally expensive, short-term financing options, so it’s important to consider all the options available to make sure a hard money loan is really the best fit for your situation.