In investment property, it is often difficult to get a loan in order to buy a property to fix and flip. The more common type of loans, the conventional loan plans, are filled with strict criteria, like good credit scores and history, and rules that you as a borrower fulfill. However, there is an easier way to borrow money, and that is through hard money lending.
What is hard money?
Hard money is a short term way to borrow money for properties without using the conventional mortgage lenders, in its place, the funds come from investors or individuals who lend you money based predominantly on the real estate you are using as a collateral. The main difference between other types of loans and hard money lending is that this type of financing does not focus on your credit score, history or even your income as collateral. Instead, the individual lenders will see the property’s value as the primary factor and emphasizes its after-repair value of ARV.
Hard money Lending Upside
Hard money loans are fast to process, because lenders focus on the value of your collateral. There is a greater potential for both parties to come to a quicker agreement than on conventional loans, because Lenders don’t need to spend as much effort and time in examining a loan application.
Hard money Lending Risks
In hard money, lenders are the ones shouldering the greater risk as compared to borrowers. As such, many of them may demand up to 10 to 15 percentage points’ higher interest rates than traditional loans. You should also assume other fees, like origination fees and closing costs, to be also at a relatively high rate. The added costs for hard money loans are a major factor to consider in the profitability of your investments. Hard money also has risks for the borrower, because it has a short timeframe. If some unforeseen delays were to happen, you may face a shortage in available funds to complete the renovations or you might have to pay more interest than you expected.
Downside of less reliability
Another risk to hard money lending is the less reliable and secure business relationship between the two parties involved in the deal. Since it is harder to determine the trustworthiness of individual investors as compared to established banks, this could lead to people falling victim to predatory lenders or it could lead to last minute terminations of the agreement.
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