Investment Information: Hard Money Loan Common Uses
Because hard money loans are generally short term, they are best used on specific investments. Here are some hard money loan common uses:
Hard money loans are generally short term and many house-flippers and developers choose this type of loan for their short-term investments. A house-flip project can be finished in a matter of months and most people don’t want to go through the hassle of taking out a long-term loan. Hard money loans are perfect for house-flippers because they’re short-term loans that can be paid off in a matter of months once the home is purchased, repaired, and sold.
Constructions loan are short term interim loans for financing the cost of construction. The lender advances funds to the builder as the work progresses. They are either obtained by the home-builder or prospective owner. Many contractors use hard money loans to buy a lot, build on it, then sell the new structure and pay off the loan quickly.
Most Hard Money Lenders can fund in a matter of days after receiving all the necessary documentation, while traditional lenders can take months. Applying for a hard money loan is a very simple process compared to traditional loans which is known for being a long and strenuous process. Once the real estate investor has been approved for the loan, they will receive the money in a matter of days. When it comes to investments, time is money.
Investors with Bad or No Credit
Even with a great investment opportunity and solid business plan, you can still leave a bank empty handed due to their strict regulations when it comes to credit scores. However, the ability to obtain loans from a hard money lender is determined by the value of the property and not the borrower’s credit score. Lenders focus on the “after repair value,” or ARV, which is an estimate of what the property will be worth once the renovation or development phase is complete. The primary focus is on the property’s profitability.
Not every investor has a perfect credit score which is why many consider hard money loans. While traditional lenders focus exclusively on credit scores when it comes to loans, hard money lenders focus on the market value of the property. They’re not concerned with your personal credit. Instead, they are focused on the real estate deal in question. This is how hard money lenders protect themselves in the event of default. Knowing the value of the property helps them limit the amount they loan to the borrower so that they can recoup their investment by taking back the property. This is how hard money lenders are able to provide financing to investors who would not be approved for a loan from a traditional lender.
Developers and House-Flippers
Developers, house flippers and short term investors are the blood of the hard money business. These type of investors main concern is getting the deal and making money from it. Most Real estate investors don’t really show much income on their tax returns but they do make enough money to make the payments, so they cannot qualify for a loan with a conventional lender. Hard Money will provide them the money they need to purchase/refinance their real estate within days without looking at their tax returns or credit.