When you have a great real estate opportunity sitting in front of you, the only thing standing between you and the opportunity to profit substantially from it is financing. You may have already reach out to a few banks or mortgage brokers to discuss your scenario, and you may have learned that banks typically will not touch the deal that you are presenting to them. Perhaps you have spent weeks walking through a bank loan process only to find out at the last minute that your loan request cannot be approved. Paying cash for the property is not ideal, and it may not even be possible for some investors. However, you do not want to walk away from such an amazing opportunity. When you need to find an alternative financing solution, using a hard money loan could be an intelligent option to consider.
What Should You Expect From a Hard Money Loan?
You may have a preconceived notion of what real estate financing entails through your previous loan applications with banks and credit unions, but hard money loans are completely different in most aspects. You should expect your hard money loan to have a term length that is close to 12 months, but there may be a variation of several months or more to this. You can also reasonably expect a higher rate and more expensive fees with a hard money loan. While these are apparent disadvantages at first glance, the benefits of hard money loans outweigh the negative aspects.
Why Would You Apply for a Hard Money Loan?
Understanding the benefits of hard money loans can help you to determine if you should move forward with an application. One of the most significant advantages of hard money is extreme flexibility. When you discuss your loan request with a bank representative, you will notice that the representative is screening the scenario to determine if your loan fits in their box of parameters. When you discuss your loan with a hard money lender, you will realize that the lender is trying to determine if the loan request makes reasonable sense from a financial standpoint. A hard money lender is not limited to only looking at projects that fall within a tiny box, and this means that hard money lenders have substantially more leeway to consider unique real estate situations like yours. The reality is that a bank loan may not even be an option on the table for you to consider. On the other hand, a hard money loan may provide you with much-needed financing.
Is a Hard Money Loan Right for Your Situation?
When you receive a quote from a hard money lender, you may notice that the term length stands out. In order to make the payments affordable and reasonable for your situation given the short term length, hard money loans are usually structured with a balloon payment. This means that hard money loans are usually only right for a situation where the borrower plans to sell the property before the end of the loan term or where the borrower plans to close on a permanent loan within this period of time. You must have a reasonable plan for dealing with the balloon payment before you take out a hard money loan. In addition to focusing on this factor, you must also determine if the monthly loan payment is affordable for your specific plans for the property.
It is easy to compare bank loans to hard money loans, but in reality, only one of these financing solutions may be right for the specific real estate project that you are looking at. You must understand how each type of loan is used so that you can take advantage of their benefits going forward. If you believe that you have a great hard money loan project in front you, spend time requesting loan terms to compare the many financing options available.