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Hard Money Lending - Guide to everything you may need to know

Understanding the fundamentals of hard money lending is the first phase in mastering real estate financing. After all, hard money loans are a real estate investor's best friend; they are the fastest way to close a deal. Hard money lending, however, can easily get difficult, so you should understand what you're getting into before making any financial decisions.

When researching real estate hard money lending, you should be aware of the following issues:

What are the benefits and drawbacks of such a strategy?

When should you use private real estate financing?

Where can you find real estate hard money lenders?

The more you know about hard money, in general, the better.

This Guide should serve as a solid foundation for learning everything there is to learn about one of today's most important sources of capital.

What Is Hard Money Lending?

Many investors who seek alternative financing not involving their local bank have likely heard the term "hard money." They might even have asked themselves a simple follow-up question: what exactly is hard money lending?

Hard money lending is a short-term loan obtained from private institutional or individual lenders with terms that are more specialized than in a traditional loan.

1. A Broad View of Hard Money Lending

Hard money lending is a way for an investor to finance their real estate projects outside of the bounds of a traditional mortgage. This is a short-term loan secured by private lenders rather than traditional financial institutions such as banks or credit unions.

Hard money lending is frequently used by investors who intend to improve or renovate a property before selling it. Given that you can usually get a loan in a matter of days rather than weeks or even months from banks, this is an excellent option for house flippers and real estate developers. This is also an option for investors who only need to make quick repairs to increase the value of a property, then secure another loan based on the increased value to pay off the hard money lender.

2. Hard Money Lending vs. Other Types of Lending

The main distinction between hard money lending and other types of loans is that it does not use your credit history or income as collateral. Instead, lenders will consider the property's value, emphasizing its after-repair value (ARV). The ARV of a property is its value after renovations have been completed.

Other distinctions include:
  1. Hard money lenders do not make primary residence investments. Owner-occupied residential properties are subject to a plethora of rules and regulations, which raises the risk for lenders.
  2. Loans are not sold to Freddie Mac or Fannie Mae by hard money lenders. Lenders frequently use their own money or raise it from a group of investors. The amount they loan is determined by their property specialization (if any) and the risks they are willing to take.
  3. Hard money loans are only for a short period of time. You will not have the luxury of repaying your loans over a period of 15 to 30 years. Hard money loans are typically repaid over a period of 6 to 18 months.
  4. Hard money lenders have their own set of lending standards. A private lender could be a friend, family member, or business associate, for example. As a result, they may not have any predetermined criteria before lending you money, giving you more negotiating power. Hard money lenders, on the other hand, have a set of upfront fees, interest rates, and durations.

The Pros of Hard Money Loans

Hard Money loans are one of the most advantageous funding options for investors to take advantage of. Few, if any, sources of capital can compete on the same level as hard money and provide the same competitive advantage. After all, it is hard money loans that many investors have to thank for acquiring their deals in the first place.

Obtaining financing through a hard money lending loan provides you with a number of advantages, including:

Convenience: There is something to be said for the ease of closing with cash. Having to provide bank statements, income documentation, tax returns, and leases to a lender can become overwhelming and drain your focus and energy. Hard money, on the other hand, eliminates the middleman and many of the hassles.

Speed: The Dodd-Frank Act is a financial reform bill that was passed in the last decade. It came with new mortgage lending regulations, which means it takes a long time often months for an investor to close a loan. Hard money lending, on the other hand, is quick, as you can get a loan in a matter of days or weeks depending on negotiations. Time is of the essence, especially for large development projects, and hard money lending can help accelerate the process.

Flexibility: Because you are dealing with individual investors, terms for hard money lending loans can be negotiated. Banks are not as popular as they once were. Banks are less adaptable.

Volume: Hard money lenders enable investors to leverage the funds of others. This means that investors may be able to fund more than one deal at the same time. Traditional loans will not accomplish this. If you want to fund multiple deals at once, a hard money loan is a good option.

Collateral: The property itself serves as collateral for the loan in the case of hard money financing. Some lenders will even accept other assets, such as a retirement account or a residential property in your name, as collateral for a loan.

No "Regulatory Hurdles": Obtaining a loan for an investment property with a traditional mortgage is difficult, if not impossible." Traditional borrowers must be concerned about their credit score, LTV ratios, debt-to-income ratios, and a variety of other indicators. Hard money lenders, on the other hand, operate as asset-based lenders who are more concerned with the property than the borrower's credentials.

In Conclusion

The use of hard money lending for real estate purchases has become commonplace in the housing industry. A hard money loan, if nothing else, gives investors an advantage over those who use traditional financing methods. Not only should hard money borrowers be able to secure capital more quickly, but sellers will also favor their cash offers. That being said, if you're looking to fund a transaction, you might not want to overlook hard money; it might be the only thing that gets you what you need.

You can reach out to private lenders like Accolend for any hard money residential loan plans and other finance-related information.

Some reasons as to why you should consider Accolend -
  • No points Loan Programs.
  • Low rate: Our competition is roughly 8-9%+ points. Even if points are removed, our loans are still priced lower.
  • Latest technology. Very few companies have tools as sophisticated as ours.

Have you ever used hard money to purchase an investment property? How did you find your experience? Please let us know how things went in the comments section below.

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