Have you considered investing in real estate but need fast access to funds? Hard money loans may be an option worth exploring. These loans, also known as bridge financing, provide cash for property deals when time is limited, or traditional financing approval isn’t guaranteed.
In this article, we’ll discuss cash loans and how they can support investment property plans. We’ll look at qualifying requirements, typical terms, and best uses like short-term rentals or house flipping. We’ll also cover improving your odds of approval and alternatives if an application is denied.
What is a Hard Money Loan?
What exactly are hard money loans? A hard money or cash loan is a type of loan that real estate investors use to buy properties when they can’t get a traditional mortgage from a bank. Traditional mortgages from banks have strict guidelines on things like how much money you need for a down payment, your credit score, the condition of the property, and how you plan to use the property.
Cash loans have much fewer rules. Lenders who offer cash loans are willing to lend money to people who can’t qualify for a bank loan, usually because their credit isn’t great or they don’t have enough money for a big down payment. However, cash loans come with higher interest rates than bank mortgages—sometimes 10% or more. They also require the loan to be paid back much faster, usually within 6-24 months.
How does cash differ from traditional loans? Cash loans differ from traditional mortgages in some important ways:
Fast Approval: Cash lenders aim to decide on applications within days rather than weeks or months. This speed allows properties to be secured before opportunities pass.
Higher Interest Rates: Variable rates tend to be significantly above banks’ averages, like 25% or more, to compensate lenders for increased risk. Rates also include fees.
Shorter Terms: Loans usually have balloon payments due within 6-36 months rather than 30 years. Properties must generate profit within this timeline.
Few Borrower Requirements: Borrowers without prime credit or full tax returns may qualify since collateral primarily secures the loan instead of borrower attributes.
For more information on hard loans, go here.
Qualifying for a Cash Loan
Qualifying for a loan from a cash lender depends on a few important things. The lender will look closely at these things to see if there is a low risk of not paying the money back:
The Property: Lenders will look closely at how much the property is worth now and how much work it needs. They want the property to be worth more than the loan amount after fixing it up. Getting an appraisal helps show this.
Extra Cash: Borrowers must show they have enough extra cash beyond the loan amount to pay for all repairs and updates. This ensures the property is fixed up nicely and ready to earn money.
Experience: Lenders like to see if borrowers have already fixed up and sold or rented homes like this before on time. Doing this well in the past proves they can do it again.
The Plan: Having a good step-by-step plan for buying the home, fixing it, finding renters or selling it, and paying back the loan shows the path to making a profit and repaying the money on time.
Credit: While not the only thing looked at, any previous money problems, like not paying debts, will raise the risk level. Good credit from before helps with applications. A lender wants to feel comfortable getting their money back.
Using Cash Loans for Real Estate Investments
Cash lending lets real estate investors try different types of promising property deals. These credits have fewer rules than loans from banks.
Fix up and Sell Quick Projects: Projects where you fix up a house and sell it fast, usually within 6-18 months, work well. The repairs have to increase the value enough to cover costs and make a profit.
See https://www.investopedia.com/articles/mortgages-real-estate/08/house-flip.asp to learn more about flipping houses
Rent Properties Long-Term: Cash can turn properties into steady money-makers by renting them out. As long as rent covers the monthly loan payments, these loans work for properties held for a long time.
Build New Houses: Loans fund the construction of new homes or buildings. Inspections at milestones ensure that money is used as projects progress.
Buy Houses to Sell Quickly: Buying houses cheaply to sell the contracts for more money quickly or renting them between sales to repay lenders over time regularly. The higher interest rates are worthwhile if deals make a profit quickly.
Tips for Succeeding with Hard Money Loans
Start with Smaller Deals to Build Experience
Pick cheaper homes to learn inspection and repair skills. Practice on less expensive houses before moving up to bigger projects. This helps you learn what you’re good at.
Have Robust Cash Reserves Allocated
Besides what lenders need to see, keep extra money saved just in case. Repairs may cost more or take longer, delaying sales and payments. The backup funds help protect against risks.
Repay Loans Early If Possible
If a property sells for more than planned or rents brings in more money than expected, pay the cash lender back early. Doing this when possible, builds a good reputation as a low-risk borrower. Lenders will trust you with larger credits later on.
Maintain Positive Lender Relationships
Keep the lender updated on the property’s status. Pay all payments on time or earlier than scheduled each month. This earns the lender’s trust over time. Lenders who know you may refer you to friends for more credits to expand your business.
Alternative Options for Getting Money if Denied
Securing quick approval from a cash lender lets deals happen fast. However, real estate investors still have good options if an application is turned down.
Seller Financing: When buying property, ask the owners if they will lend you money and let you pay them back over time. If you know them, they may say yes.
Private Individual Lenders: Contact people who lend money privately without banks in the middle. Rates are higher than normal credit but usually lower than those of cash lenders.
Specialist Portfolio Lenders: Some direct private lenders only offer lending for real estate investing. Approval takes longer, but depending on your history, terms may be better than cash.
Home Equity Line of Credit (HELOC): If you own a home already paid off, you can use its value as collateral for a line of credit up to six figures to invest.
Crowdfunding Websites: These sites match accredited individual investors directly to borrowers for advances or projects like developments. You need to register, but it gives you another chance.
Click here to learn more about alternatives to hard money loans.
Also read more article” 5 Ways a Personal Loan Can Double Up as Your Emergency Fund
Final Thoughts
High-cost quick loans can help serious property buyers, but only if the risks are clear. These expensive short-term loans are not for every project or stage in a person’s buying career. But they do fill important short-term needs when timing is important.
Not every situation needs quick loans, either. Buyers must think about whether projects are worth the costs. Early careers may find other funding smarter until experience grows. But for urgent deals needing quick turns, quick loans unlock property until normal banks approve.
