Unlike traditional lenders, hard money loans are backed by an asset. As a result, you can be approved for an investment property without meeting strict credit and income requirements. Additionally, because you are working with a private individual or company, you can negotiate flexible terms on a case-by-case basis.
Private lenders provide hard money loan San Diego and typically offer a much faster approval process than mortgages. They also require less documentation, including bank statements, income documentation, and tax returns. This can be helpful for house flippers who want to fund a large volume of deals quickly. They are secured by a physical asset (usually real estate) that the lender will take ownership of if you default on your loan. This allows them to overlook many issues a borrower might have on their credit report or lack of down payment. They are more concerned about the equity a borrower has invested in the property, their exit strategy, and their ample experience. This allows them to offer a loan in days instead of weeks or months. The downside to this is that these loans have higher interest rates. They also have shorter terms. This is why they are typically used as short-term bridge financing options.
More Flexible Terms
Unlike banks with lengthy lists of requirements, hard money lenders are primarily concerned with the investment property’s value and equity invested in it. They’re also less concerned with the borrower’s credit history and income, which is still essential. This flexibility allows borrowers with recent short sales, foreclosures, and bad credit to get financing. Additionally, since hard money lenders are private investors instead of a bank with strict policies, they can be more flexible when negotiating loan terms. For example, arranging a shorter repayment period or even reducing specific fees is often possible. This flexibility benefits house flippers who need funding quickly to purchase and rehab a property and then sell it at a profit. They need to have the time to wait for a traditional mortgage approval process that can take months. Instead, they can turn to a hard money lender and close the deal within weeks.
Higher Interest Rates
Financing from hard money lenders often comes with higher interest rates than conventional bank loans. However, this may be a small price to get a loan funded and close a deal quickly. Hard money lenders also have fewer requirements than traditional banks, meaning loan approval is more likely to occur. Lenders will consider the property’s value, borrower equity or down payment, experience (if applicable), and exit strategy. Borrowers should ask their lender if the points they charge include all the fees they will incur. Some lenders will add extra junk fees, which can significantly increase the loan cost. While hard money lenders usually perform credit checks, they are more concerned with the property’s investment potential than the borrower’s financial history or credit score. New investors typically need an established credit history and can still qualify for a hard money loan.
Despite their reputation for being predatory, hard money loans can offer fast cold cash to investors in exchange for high-interest rates. Physical assets such as real estate or precious metals secure these loans. However, borrowers should know that hard money lenders have their criteria for qualifying a borrower. Some lenders require a specific down payment, while others focus on credit history and income verification. They may also have higher interest rates than traditional banks because they are subject to different compliance and regulatory rules. As a result, many property flippers use hard money loans to make their deals faster and more profitable. These loans are also helpful for people with poor credit who can’t qualify for a mortgage due to foreclosures, late payments, or bankruptcies. And, unlike conventional loans, hard money loans are usually short-term. That way, borrowers can quickly flip the property for profit and repay the loan before the term expires.