Hard money loans are a viable method for real estate investors to obtain financing without having to deal with the stringent guidelines and lengthy underwriting process commonly experienced with banks, credit unions or mortgage agencies. Traditional lenders typically underwrite loans through a lengthy financial and credit process—which can make it challenging for investors to get the money they need when they need it to close a transaction on a promising property.
The standard definition of a hard money loan is a loan borrowed against tangible collateral, as opposed to using a strictly metric-based formula consisting of credit scores, income, etc. For those individuals that are looking to expedite the closing timeline or who may have a less-than-perfect credit score, hard money can be the perfect solution. The following is a closer look at hard money loans, how they operate and how investors can use them to their advantage.
The Basics of a Hard Money Loan
The simplest way to comprehend the ins and outs of hard money loans is by comparing them with traditional loans and mortgages. Only a small percentage of investors have the requisite degree of liquidity to simply purchase a property outright. Instead, they obtain a loan from a financial institution—purchasing the property with the money they are lent and then make incremental payments back to the lender over a certain period of time.
This classical approach to buying property has some important requirements tied to it. For starters, banks will need assurance that you are a reliable borrower who will pay back the outstanding loan balance on time and not default. They typically assess potential borrowers by analyzing credit scores, which they use to gauge the likelihood that the borrower will pay the money they lend them back. Essentially, the higher your credit score, the more likely it is that a bank will lend to you at a preferable interest rate.
On the other hand, hard money loans generally do not begin with a credit score assessment. They start with looking at the collateral. The Real Estate asset is the most important part of the lending decision for Hard Money loans. . Instead of relying solely on your credit score or bankstatements, hard money lenders will request that you offer a tangible asset as collateral if you are unable to pay back the loan. Put simply, a hard money loan is a short-term loan secured by real estate. The funds are sourced by private investors instead of a bank—meaning they don’t have to abide by the strict federal regulations when it comes to underwriting loans. This translates into your loans being approved in a fraction of the time that it takes traditional lenders. What’s more, hard money lenders like Jcap Private Lending pride themselves on crafting flexible and intuitive payment schedules specifically tailored to the demands of your investment project.
The overall amount of a hard money loan is largely dependent on the value of the underlying collateral: the property. It may already be in the borrower’s possession, or it may be the subject property that the borrower is planning to purchase. Although credit history is considered, hard money lenders are primarily interested in the property’s value. For investors that recently experienced a foreclosure or short sale and are finding it hard to obtain traditional financing, a hard money loan is a possibility assuming they have sufficient equity in the collateral property.
Hard money loans can be used for essentially any property type including single-family residential, multi-family residential, commercial, land or industrial. Here are some scenarios where hard money loans are particularly effective:
- Fix-and-Flips: If a run-down property with great potential is available and an investor believes they can fix it up and sell it for a premium price-point in a relatively short timeframe, then it doesn’t make a lot of sense to go through the hassle of obtaining a 30-year traditional mortgage on the property. Instead, by taking advantage of the JCAP fix-and-flip lending program, they can get all the money they need to acquire and renovate the investment property and pay off the short-term loan with ease.
- Builders: Major real estate developments are complex. Jcap Private Lending has over 30 years of experience coordinating funding for all types of builds and can work with borrowers to develop a realistic and flexible solution to ensure the project goes smoothly at each and every stage.
- Investors: Real estate investors often stumble upon an amazing listing that needs to be acted on quickly. If they don’t have the money on hand to take advantage of the deal, a loan that is short-term and processed quickly by a hard money lender could make all the difference.