Hard money loans are another option for real estate investors when a traditional mortgage lender may not work for their situation. A hard money lender uses a property as a “hard” asset and collateral. There a ton of ins and outs. Let’s break it down.
What is a Hard Money Loan?
A hard money loan is an asset-based loan. One of the biggest factors affecting the approval of a traditional loan is your credit history and income. Lenders want a candidate that possesses a reputable re-payment history because this demonstrates the consumer’s ability to repay loans.
However, it is no secret that a great credit score and a lot of income, isn’t necessarily a golden ticket to approval – the overall process can be invasive and take a long time. Hard money lenders utilize a different approach by lending funds based on collateral; therefore, the lender places less emphasis on credit history.
Hard money loans are not for everyone, but there are several situations where these loans make sense. Thanks to Chip and Joanna Gaines, one of the biggest investment trends is flipping houses. If you’re just starting out, and do not have the capital to put up front, a hard money loan makes sense – you’ll own the property for a short window so that you can remodel the property and sell it.
How Does a Hard Money Loan Work?
Generally, hard money loans are contracted for a short-term – usually between six months to 24 months. A real estate investor would not want their loan for a long period of time because the interest rates are typically higher than traditional loans. One of the biggest benefits of choosing a hard money loan is the speed at which you can close. Walnut Street Finance can close as quickly as seven days which is essential when trying to win the bidding war on a property for your next project.
Basically, hard money loans allow real estate investors and developers the opportunity to purchase more properties and do more deals with less upfront capital which results in a great return on their investment.
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How is a Hard Money Loan Different from a Traditional Loan or Direct Loan?
There are a number of factors that differentiate hard money loans or private loans from traditional and/or direct loans. Hard money loans differ from traditional bank financing because they offer greater leverage to the borrower and they are able to close and fund deals faster than a traditional bank loan.
- Speed: Most hard money lending companies are not as concerned with your financial position – unlike traditional and direct loan lenders which allows them to move more quickly through the loan closing process. Hard money lenders can close in as little as seven days if the borrower is well prepared and the property doesn’t have any red flags. Speed can really be a deal breaker when multiple offers are on the table.
- Adjustable Repayment Schedules: Typically, traditional and direct lenders do not have a lot of flexibility when it comes to the underwriting process. Hard money lenders have the freedom to tweak repayment schedules and other conditions, within the contract, because they are not held to strict guidelines and regulations like traditional banks.
- Approval: Hard money lenders loan money based primarily on the value of the property. We do consider borrower credit history and experience, but our loan programs are flexible enough to work with all borrowers who have a decent deal and borrower profile.
What’s a Bridge Loan?
A real estate bridge loan, sometimes referred to as a “swing loan,” “gap financing,” or “interim financing,” is a short-term loan that “bridges the gap” or gets a borrower from point ‘A’ to ‘B’ by leveraging the equity in a property they already own. Bridge loans are ideal for real estate investors who have multiple projects in progress and are awaiting the sale of one project to come through so they can get started on the next project.
What’s a Construction Loan?
Hard money construction loans are frequently used to finance residential or commercial new construction projects. Typical construction loans run for six months to two years, requires interest-only payments – that are often bundled into the loan itself – and are funded in installments that follow a predetermined schedule of milestones.
What’s an Acquisition Loan?
A real estate acquisition loan is financing for the purchase, or acquisition, of property. The targeted property may be intended for resale by a wholesaler, for a fix and flip project, or for a condominium conversion, but as long as the loan is earmarked for the purchase only, it is considered to be an acquisition loan.
What Properties Do Hard Money Lenders Lend On?
For the most part, a borrower can obtain a hard money loan on just about any property – single-family residential, multi-family residential, commercial, land, and industrial.
It is important to note that Walnut Street Finance will not extend a loan on an owner-occupied residential property and must fall into either a fix and flip or a fix and hold (typically to rent) scenario.
How Do You Get a Hard Money Loan?
For starters, you need to have a property in mind for your real estate investment project. Once you have a property identified, you need to submit your information to apply. Each deal will be different, however, we generally require a personal financial statement, proof of income and property information. Then the deal will go through the underwriting process to be approved. If the deal is approved (which can take as little as seven days) then we proceed to closing.
I’m now working on my second project with WSF. The loan process for both was fast and easy. My second loan closed exactly four days after I brought them the deal. Looking for another deal now!Chris J.Washington, DC
The WSF team has been fantastic and hands-on the whole way. They have been easy to work with, and have given me tips on everything from roofing to sod, then helped me find a great local realtor and stager. A great partner.John G.Vienna, VA
I have worked with Walnut Street Finance on two deals in DC. Our first property is under contract above asking price, and we're underway with the second. The Walnut Street Finance team has been very helpful and done everything possible to help me succeed.Andy S.Alexandria, VA