Updated: Oct 11, 2022
Getting a hard money loan for beginning investors is a great way to fund your first investment property. However, it can be challenging to know where to start and how to get started. In this post, we'll talk about the difference between hard money loans and traditional bank loans, how much you can expect to pay in interest rates and fees on a hard money loan, and provide some tips on getting approved for one of these types of loans.
What are hard money loans?
Hard money loans are short-term loans that are based on the value of the property, not the borrower's credit. They're collateralized by the property, not by you as a person. In other words, if you can't make payments on your hard money loan, it will go into foreclosure and your lender will take possession of your house (and sell it).
The main purpose of hard money is to buy houses that need work—not necessarily fixer-uppers but houses that have been remodeled or improved upon in some way to increase their value. For example, if you wanted to flip an old ranch house with a pool into a modern three bedroom home with granite countertops and stainless steel appliances, then this could be something where a hard money lender would be useful.
Who uses them and what types of properties are eligible?
Hard money loans are most often used by investors who want to purchase hard-to-market properties in need of repair, or fix and flip. They're also popular among investors looking to buy properties that don't qualify for traditional financing due to their location, condition, or other factors.
Hard money lenders typically require borrowers to put down 10 - 20% or more of the purchase price—and will even accept as little as 5% if you have enough equity. The loan term lasts 12 months (or less), so you'll want to be sure your plan includes renovations that can be completed within that time frame.
What are the benefits of hard money loans?
Hard money loans can be used to close deals quickly. When you're a beginning investor and want to get started with your first investment property, it's hard to beat the speed at which hard money lenders can close on their deals. In fact, many people who use this type of financing (and even those who don't) say that using it helped them get into the market faster than they would have otherwise been able to do so.
Lastly—and perhaps most importantly—hard money loan programs typically don't require any additional fees besides what's built into their terms: no appraisal costs; no credit check fees; nothing else! Most investors won't have problems getting approved because they'll be backed by valuable assets like land or buildings that are appraised regularly anyway; therefore there's no need for additional paperwork before applying for these types of loans either."
When should you use it?
If you're a beginning investor and are looking for money to invest, you may find yourself wondering if there's a way to get it fast. The answer is yes: hard money loans.
Hard money loans are similar to conventional loans in that they both involve borrowing money from someone else with the intention of paying it back at some point in the future. However, hard money loans differ from conventional loans because they tend to be short-term (usually only lasting around 12 months), high-interest rate(s) (7-12%), and risky—hardly any other kind of loan requires the borrower to put up as much collateral as they do with a hard money loan.
And while these drawbacks might seem unfavorable at first glance—and indeed they can be—they also present a host of benefits that make them an attractive option for many different types of borrowers.
How much do hard money loans cost?
Hard money loans are typically more expensive than traditional bank loans. The interest rates charged by hard money lenders are typically 1-2 points above the prime rate, which is currently 6.25%. This means that if you borrow $100,000 at 10%, you’ll pay an effective annual rate of 11% to 13%.
In addition to charging a higher interest rate than banks, hard money lenders often charge origination fees of 1-5%, depending on the amount of your loan and what type of property it will be used for (a commercial loan may have higher fees than a residential one). Origination fees cover administrative costs like paperwork and documentation processing; they don’t go into your pocket!
Other things you should know about hard money loans:
Hard money loans are not regulated by the government.
They’re typically considered “higher risk” because they’re more expensive and made to borrowers who may not qualify for traditional bank loans.
How do I get started with you? (What's the process for getting a loan?)
If you’re ready to get started, here’s what it takes:
Get pre-qualified. To apply for a hard money loan, we recommend getting pre-qualified first. This means that we'll evaluate your loan request and tell you how much money we can lend based on what the property is worth, how much equity you have in it, and other factors. We'll also discuss our lending terms so that there are no surprises later on in the process.
Apply online. Once you've been pre-approved by us (or another lender), fill out an application online (It will be sent out to you) or email us at email@example.com with any questions or concerns during this time!
Send documents to lender & wait for funding! After submitting all required documents to us (and hopefully being approved), we will send them off to our underwriting team for processing—and then…voila! You should receive funding within 1 business day after receiving final approval from our underwriters (usually sooner).
The process for getting a hard money loan can be complex, but it doesn’t have to be. If you want help navigating through the process, we encourage you to reach out to us and ask any questions that you may have. We’re here to answer questions and make sure that your journey into real estate investing is as smooth as possible.