Hard money loans are easier to secure than a traditional bank loan. However, they have a reputation for higher interest rates.
While the average 30-year mortgage insurance rate is around 5%, hard money borrowers can pay up to 10%. Rates can vary significantly, though, depending on current supply and demand.
A higher interest rate isn’t necessarily a negative component, especially if you require a loan for only a short period. Plus, private hard money lenders use your equity in an asset as leverage for a loan, rather than your credit score.
Hard money loans have paved the way for real estate investors to finance properties quickly and turn significant profits as a result.
Keep reading to learn all about how they work!
What Is a Hard Money Loan?
Hard money loans are defined as loans that are backed by “hard” assets. A hard asset is a tangible property. That property is typically responsible for producing a profit. That profit is then used to repay the loan quickly.
The sum of money that is lent to a business or individual is backed by physical assets. While real estate is the most commonly used asset to support a hard money loan, other assets could be used too.
The main differences between a hard money loan and a traditional loan lie within the approval process, the loan terms, and the purpose of the loan.
How Are Houston Hard Money Lenders Different Than Bank Lenders?
One of the most appealing elements of a hard money loan is how quickly it can be secured. Hard money lenders do exactly what banks do: they loan money. However, the funding comes from private lenders, not government-regulated financial institutions.
Hard money loans are shorter in length, too. A traditional mortgage is typically paid over a period of 15 to 30 years, whereas most hard money loans aren’t termed for much more than a year.
Traditional bank loans are dependent on a borrower’s credit. With a hard money loan, lenders will grant a loan based on the value of one’s home or property, not their credit score.
Types of Houston Hard Money Loans
Hard money loans are most commonly used to fix and flip homes. While property developers take out the majority of hard money loans, there are a few different types used.
Bridge Loan
Especially when it’s a competitive seller’s market, buyers can find themselves in a position where they need to act fast. A bridge loan enables a borrower to buy quickly.
Say a homeowner is looking to purchase a new home but hasn’t yet sold their current house. A bridge loan can help someone buy a new property before they can cash out on their main home. Sometimes, those who don’t qualify for a mortgage opt to take out a bridge loan.
Fix and Flip
A fix and flip hard money loan provides a borrower with the funds to buy a property quickly, fix it up, and then resell it. The idea is that the sale will cover the cost of the loan, property, and generate a profit.
Construction
In construction, the longer a real estate developer has to wait without developing, the faster they lose money. Sometimes investors back out or an unexpected event results in a need for additional funds.
Houston hard money lenders allow for real estate developers to get moving on their already greenlit projects.
Owner-Occupied Loans
Whether it’s due to poor credit or non-existent credit, many borrowers don’t qualify for traditional bank loans. As a result, they must opt to borrow against a physical asset.
Other Hard Money Loans
Private hard money lenders offer loans on a case-by-case basis. Unlike traditional bank loans, hard money loans boast more ways to negotiate and offer less strict lending options.
Sometimes a borrower will take out a hard money loan for a reason other than real estate. They might use their car or another expensive physical asset to back their loan.
Cons of Houston Hard Money Loans
There are a few cons to borrowing through private hard money lenders, depending on your situation.
Higher Interest and Shorter Repayment
Higher interest rates and short repayment schedules mean that the borrower should be confident they can repay the loan within the agreed time frame. These components only become a drawback if the borrower can’t sell their current asset or pay off the loan in time.
It’s also important to be mindful of higher closing costs and origination fees.
Speed
Another con of hard money loans is also one of its pros. The convenience and speed with which one can secure a loan may warrant a higher percentage rate. While these loans are easy to acquire quickly, it’s vital to discuss and explore your options before you jump in.
Pros of Houston Hard Money Loans
Let’s take a look at the many positives associated with hard money loans.
Speed
Mortgage lending has regulations listed in the Dodd-Frank Act. Sometimes it can take months for an investor to be able to close a loan. Hard money loans, however, come with their own set of rules.
More often than not, you can secure a hard money loan in weeks or even days. Because time is of the essence for prominent real estate projects, speed is one of the biggest pros of borrowing hard money.
Collateral and Flexibility
The property itself or another asset becomes the collateral for a hard money loan. Sometimes lenders accept other assets like a car, other tangible property, or even a retirement savings account.
Since private lenders are more flexible than traditional bank lenders, there’s much more room for negotiation.
When an individual or business applies for a traditional bank loan, they must present bank statements, tax returns, income documentation, and credit history. This can be a daunting task, especially for those who want to avoid the headache and close with cash.
Convenience
Hard money is backed by collateral assets, so there’s less of a need to focus on the borrower’s ability to repay.
Volume and Competition
Through Houston hard money loans, investors can take on more than 1 project at a time. If they have the collateral to back it up, they could fund many deals and projects at a time.
Plus, hard money loans enable those investors to beat out their competition. Timeliness and cash put them ahead of the pack when there’s competition amongst potential buyers or investors.
Who Uses Hard Money Loans?
There are quite a few circumstances in which hard money borrowing is the better option than traditional financing.
Here are some examples of when hard money lending is ideal:
- You don’t have time for a lengthy traditional borrowing process
- Your credit score is not high enough
- Your income history doesn’t meet traditional lender requirements
- You can’t get enough cash from other resources, such as family or friends
- You need guaranteed quick access to cash for a fix and flip property
- You don’t have the capital to cover the renovations costs for the property you’re going to flip
Someone who has borrowed hard money in the past may be at an advantage, too. While interest rates might be higher for the first flip, they should get progressively lower as you become a reliable candidate with positive hard money borrowing history.
How to Find a Reputable Hard Money Lender
Anyone who has lending capital could call themselves a hard money lender. It’s vital to find a reputable, honest hard money lender with reviews and a standard of work to prove their reputability.
Before you borrow, do your research to ensure you borrow from lenders who boast an excellent track record. Here are some questions to ask during your search:
- Are you the lender, or are you a sub-lender?
- What is the source of your capital?
- Do you take credit scores into account?
- Do you offer extensions on your loans?
- Have you ever foreclosed on a loan?
- Do you have references from previous borrowers?
- How quickly are your loans processed?
- Within the last year, how many loans have you processed?
- Once a loan is funded, does it stay in-house, or is it sold?
- What kind of documentation is required?
- What are the origination fees?
While private hard money lenders aren’t as concerned with credit history, if they don’t care at all about credit, it could be a telltale sign of shady practice.
Find the Best Houston Hard Money Loan for Your Investment Needs
Hard money loans provide a reliable, easy way to get cash fast. They’re perfect for investors who want to fix and flip properties and for homebuyers who don’t qualify for traditional bank loans.
Plus, the approval process is quick and easy. Are you looking for immediate consideration? Fill out our loan inquiry form here.
We have loans available for immediate investment, too, and investors earn up to 12% on the return. We offer creative funding solutions and are happy to address any questions or concerns you have!