Hard Money Loan Risks and Benefits for Real Estate Investors

Have you finally found the perfect investment property only to discover no bank wants to provide you with the needed funding because of the property’s poor condition? If so, you may be surprised to learn this is a situation that is more common than you think. In these cases, the best solution may be a hard money loan.

Understanding the Hard Money Loan:

Just like any other loan, when you seek a hard money loan, you are going to receive a certain amount of money from a lender you have chosen. The terms of the loan you receive will vary based on the actual contract that the lender has.

As the borrower, you will receive the money, and then the lender is going to receive interest on the funds each month until it has been fully repaid. Additionally, some hard money lenders charge a one time up-front fee to borrowers to process the actual loan.

When you take out a hard money loan, you will be backing it with a physical asset, which is going to be the property you are planning to buy. A more traditional loan would be based on your actual credit score, which can be prohibitive for many.

Where Can You Get a Hard Money Loan?

[sociallocker id=”4032″]This type of loan is not offered at banks. You will need to acquire it from an individual investor or an investor group.

Who Can Benefit From a Hard Money Loan?

These types of loans are usually used for purchasing real estate. If you want to flip a property, purchase a distressed property or something similar, acquiring the funding from a bank or other traditional lending institution is going to be extremely difficult, if not impossible. This is when the hard money loan is the perfect option.

Benefits of Choosing a Hard Money Loan

Some of the specific benefits of choosing a hard money loan include:

  • Faster process: Working with an individual lender means fewer hoops and faster approval times.
  • Ability to borrow more: With this loan you can borrow up to 100 percent of the purchase price.
  • Establish a relationship: When you establish a relationship of repaying the money on time, the lender will be more willing to work with you in the future.
  • Great for starting out: This is the ideal option for those who are just starting out with real estate investments.

Potential Risks of a Hard Money Loan

Even though there are extremely appealing benefits to taking out a hard money loan, there are also some risks you should be aware of. These risks include:

  • Higher interest rates: In many cases, these loans come with high interest rates ranging between 10 percent and 20 percent.
  • Higher origination fee: This is the initial fee charged by the lender to process the loan, and is usually a certain percentage of the loan.
  • Not a long-term option: While you can have a 15- or 30-year mortgage with a traditional loan, most hard money loans will need to be paid back within just a few months and some up to a few years. If you fail to do this, the interest rate will likely increase.
  • Loss of the property: Because you are using the property as a guarantee for the loan, you may lose it if you are unable to repay the funds.

When you understand the benefits and risks associated with a hard money loan, you can make an educated decision regarding whether or not this is the right funding option for your real estate purchase.  To learn more contact Allrise Financial Group today at 888-674-695 or apply online. [/sociallocker]

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