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Real estate investors usually end up taking a hard money loan sometime in their career. About 5.51 million existing homes were sold in 2017, and some of them were funded by hard money loans. Knowing what scenario makes a hard money loan suitable is important for anyone in this business. Hard money lenders are more likely to take a risk and provide a loan in comparison to traditional lenders. Sometimes traditional financing options are unavailable which leaves the option of hard money loans open.
Traditional lenders have a long checklist of requirements that need to be fulfilled to qualify for a loan. When it comes to hard money lenders, the lending standards are driven by the asset’s value. This makes it easier to qualify for a hard money loan. Once you identify the need for a hard money loan, you can plan the steps that are to follow. Evaluating the hard money lender is also an important step that will help you in the long-term.
Traditional financing options do not accommodate all the scenarios that an investor faces. This creates a space for hard money loans to fill in the market.
If you intend to fix and flip a home
In 2016, 193,009 single family homes were flipped in America. Sometimes an investor might want to fix and flip a home for a profit. This happens because investors see more potential in the property and hence intend to upgrade it. Once a property goes through the process of such an upgrade it becomes more appealing in the market. Major repairs or renovations are two such ways through which the value of the property can be increased. This allows for the property to be sold at a profit.
Traditional lenders are not interested in providing loans for a property that requires too much effort to sell. A property that needs too many repairs would be out of the comfort zone of such lenders. Moreover, even if they do provide a loan, the process would be too slow. Hard money lenders, on the other hand, would be able to provide short-term loans. Hard money loans can end up being approved within a week, so availing access to fast capital becomes more possible. This makes a hard money loan highly preferable.
With quicker access to funds, investors can use a hard money loan to fix and flip a home easily.
If your credit score is not perfect
Traditional lending sources will clearly not be able to provide you with a loan if you have a bad credit score. These sources tend to be very rigid when it comes to certain aspects of your financial history. To get a traditional loan from a bank, you need to satisfy all the conditions mentioned in the regulatory guidelines. An inability to satisfy any of the conditions leads to a straight refusal from the traditional lender. Not only are traditional lending sources slow, but they also do not work for every individual. A decision to take a hard money loan becomes obvious when you cannot qualify for other loans.
Hard money lenders primarily care about the value of the property. They are more likely to provide you with a loan even if you have a bad credit history. As long as you have some asset to offer as collateral, you are good to go. The credit score or income history becomes irrelevant. This flexibility provided by hard money lenders make it a great option for real estate investors. If you want to close a real estate deal, a hard money loan may be the right choice for you.
A poor credit rating doesn’t need to be worried about, hard money loans have your back.
The property needs to be purchased quickly
Good real estate opportunities demand a rapid response but processing a traditional loan takes too much time. If you need to have the money to close a deal quickly, a hard money loan is more appropriate. A traditional loan is essentially ineffective when you need funds quickly. Whenever a property needs to be bought quickly, real estate investors cannot rely on the tedious and time-taking traditional loans.
It is very easy to lose a great real estate opportunity because of a delay. Traditional loans can take up to forty-five days to process. A hard money loan can be processed in as little as twenty-four hours. This is why they are a great option when an investor needs capital quickly. The higher cost of a hard money loan also makes sense since the good real-estate opportunity is not lost.
To seal a deal quickly, the quicker financing option is needed.
Conclusion
Sometimes traditional lenders are unable to meet the needs of a real estate investor. Whenever investors with a bad credit score apply for a traditional loan, they end up unable to qualify for it. Other than that, in some cases, investors may need access to capital quickly. This is when traditional sources are too slow to provide capital. Hard money loans are better able to tackle situations which demand fast access to capital.
