Reasons to Choose Hard Money Loans Instead of Traditional Financing
Residential rehab provides distinct financial issues for investors. You will need a significant amount of finance to get your project off the ground, as well as sufficient funds to see it through to completion. Most of the time, you will need a loan to kickstart your rehabilitation and get work done. However, traditional loans call for a protracted approval procedure, stringent adherence to approval criteria, and substantial down payments. This leaves the investor strapped for cash after they have bought the property and repairs have begun. Because there was a vacuum in the market for financing, hard money loans were created to fill the need.
Filling in the Financing Gap Between Purchase and Refinancing
Conventional loans often demand more outstanding down payments from borrowers than do hard money loans; thus, lenders will anticipate that you will pay between 20 and 25 percent of the property’s purchase price upfront. After the first purchase, developers that specialize in the “fix-and-flip” strategy still need funds to pay the up-front costs associated with the renovation of an older property to the point where it is in a state that is marketable and appealing to potential purchasers. It is just not possible for the majority of investors to utilize traditional finance and then pay for the rest of the refurbishment out of their funds at the same time.
Hard money loans, often known as “bridge loans” or “construction loans,” are the kind of loans that may be used in this situation. They have the potential to become an essential component of your collection of funding tools. You could buy the home with as little as a 10% down payment if you obtained a hard money loan, then you could refurbish it, and then you could look for permanent financing.
After the refurbishment, the property’s worth should have an increased assessment value, and ideally, the matter should be high enough for the refinancing to repay the original loan and closing cost without requiring the borrower to make any more payments out of their pocket. A traditional lender may renew the loan for 75% of the property’s new assessment value.
When you’re in the business of purchasing foreclosed homes as a developer that specializes in “fix-and-flip” projects, the closure of the transaction might be time-sensitive. Traditional bank loans are subject to heavy regulatory restrictions, need a substantial amount of documentation before loan approval, and may take anywhere from a week to a couple of months to get. The approval process for hard money loans typically takes one week, but may sometimes be completed on the same day. It is a realistic funding option that will get your business started with a minimum of bureaucratic hurdles.
Hard moneylenders, in contrast to traditional lenders, are granted the freedom to operate according to their own, unique lending criteria. In the residential rehab market, many of the houses that investors are wanting to buy do not satisfy the requirements established by the FHA. As a result, lenders are unable to offer loans for these properties using Fannie Mae or Freddy Mac. This makes the acquisition of traditional funding completely difficult.
Hard moneylenders are allowed to ignore a significant number of the regulatory limits that are imposed on banks, which enables us to swiftly approve purchasers and conduct a considerably more comprehensive evaluation of borrowers’ credit histories. The approval of a borrower by a hard moneylender is contingent on the following factors: the merits of the project, the borrower’s experience working with the type of project that they’re tackling with the loan, and an agreement on a viable exit strategy to pay off the loan before its maturity date. If you have a credit rating that is less than stellar, but you can provide a rational justification for why it is that way, hard moneylenders may look beyond that and still give you a loan anyway. It takes an approach that is far more realistic than the one you get with traditional lenders.
You can understand more by reading the article hard money to conventional loan to understand the pros and cons of both.