Property investing is a high-stakes industry, as it takes a lot of spending to make money. However, most people don’t have hundreds of thousands of dollars on hand. That’s where hard money lending comes in.
Unlike a traditional mortgage, hard money loans have a fast application process so that investors won’t lose a valuable business opportunity. Of course, there are several types of hard money loans, each with its own benefits. For example, if you plan to flip a house, you should consider a fix and flip loan, as it’s specifically designed with your needs in mind.
How Is Fix and Flip Real Estate Different From Regular Home Buying?
The main idea behind flipping property is to get more than you paid for it. Doing so requires renovations. While most property investors make changes to increase curb appeal, flipping uses more extensive and expensive updates:
- Finish the basement
- Install new kitchen countertops
- Redo flooring
- Upgrade major appliances to energy-saving models
As a result, house flippers need larger amounts of cash and more flexible use. As a result, they’re more likely to benefit from a fix and flip loan than a traditional mortgage.
What makes these types of hard money loans different? For one, they have higher interest rates — sometimes as high as 18%, though they can be as low as 10%. Since the lender is taking a big risk, this is to be expected. Fortunately, many borrowers work on an expedited timeline and plan to pay off the loan before it’s due. How is this possible? Once the updated house sells, borrowers can make the payoff in one lump sum.
What Are the Benefits of Choosing a Hard Money Loan?
One of the best things about using a hard money loan to flip houses is the quick approval time. A traditional mortgage can take as long as 45 days, while a hard money loan usually takes only a few weeks. Depending on the circumstances, you can access funds in a matter of days. Having this cash on hand gives you an advantage when negotiating, as sellers are more likely to accept guaranteed payment. You may even be able to barter for a lesser price in exchange.
Cash on hand also means a faster closing. Since you don’t have to wait on a bank for approval, you can quickly pay all fees and take possession of the property in a little more than a week.
Hard money loans are also much shorter than mortgages. Traditional mortgages are designed for owner-occupied property, allowing homeowners to get the most out of their residence while they pay off the loan. However, flippers want to sell as quickly as possible, so there’s no need for a 30-year term. Instead, most hard money loans last less than two years. That’s plenty of time to renovate a property and list it.
How Can You Qualify for a Hard Money Loan?
If you want a hard money loan to flip a property, you usually need to put down at least 20%. Remember, your total costs are a combination of the following:
- Purchasing
- Labor
- Materials
- Permits
Most hard money lenders aren’t overly concerned with financial statements, so there’s much less paperwork than a bank application. The lack of red tape is also why the approval process is faster.
What Should Borrowers Know About Hard Money Loans Before Applying?
Repayment of hard money loans varies by lender. For example, some lenders require fixed monthly payments, while others expect a complete payoff before the end of the loan. In some cases, borrowers must make monthly payments on the accrued interest. Each option has its benefits, so consider them carefully before you sign a promissory note.
Depending on the lender, you may also have the option of drawing funds from an escrow account as necessary. Doing so allows you to use funds for renovations and repairs as they surface. Of course, if you take this option, you must create a draw schedule that dictates when funds are dispersed.
Where Can You Apply for a Hard Money Loan?
If you need funds to flip houses, look no further than HML Solutions. We provide a variety of financing options to property investors. For more information, contact us today.
