What Hard Money Loans Are (and Aren't)
Multi-family real estate is one of the most popular investments for both newbie and seasoned investors. Buyers in the past used traditional financing. And until recently, multi-family loans are the best alternative financing for investors; however, this was not always the case.
Not too long ago, the hard money lending industry was riddled with shady mortgage brokers who provided risky loans to unsuspecting clients with the aim of foreclosure on the property.
Luckily, such realtors don't exist in today's market. And although lingering stigma remains in some investors who have not yet used the services of a trustworthy hard money lender, understanding the basics of hard money lending is the first step in securing a reliable hard money loan.
Hard money loans are short-term lending instruments granted to real estate investors to finance their investment projects. Unlike traditional bank loans, your ability to get a hard money loan depends mostly on the value of the property — not your credit score or income.
Most hard money loans come with term lengths of less than a year; however, there are longer loans of up to 5 years. Since each hard money loan is different, your exact terms depend on the deal you strike with your lender. Everything from interest rates, closing fees, or costs in the terms of points should be discussed before you commit to anything.
How Hard Money Differs from a Bank Loan
Hard money is a type of loan financing that uses the real property as collateral. In most cases, hard money loans are granted as short-term bridge loans or as the last option. These types of loans are generally used in the real estate industry, with the lenders being private individuals or companies — not conventional banks.
The property itself is the security. That means the lender cares less about your T4 or your beacon score, and more about what the building is worth and what you plan to do with it.
Why You Might Choose Hard Money
Advantages of hard money financing include:
Flexibility: A hard money lender might be more willing to finance your fix-and-flip strategy compared to banks.
Fast Approval: Private investors can make financing decisions faster than banks since they're focused on the collateral rather than your creditworthiness.
Negotiable: Hard money loans are negotiable unlike conventional bank loans. You might even be able to tailor your repayment schedule or get origination fees reduced during underwriting.
Bad Credit Doesn't Disqualify: As long as you have a good plan, equity, and a way to prove your real estate experience you can secure a hard money loan.
When Hard Money Makes Sense
Although hard money loans are appealing, they may not be perfect for all types of mortgage deals. When you're purchasing a primary residence with a good income history, perfect credit, with no issues like foreclosure or short sale, normal financing through a bank might be the best course of action.
Hard money is the best source for financing when other financing options are impossible, or when you need the loan urgently.
Hard money loans are ideal for:
Fix and Flips
Investors with credit score issues
Investors with time constraints
At times, it may be a better idea to get pre-approval with the assistance of a Mortgage Professional for upcoming real estate investments.
The Trade-Offs
Hard money loans are not always the best financing option. Here are two main disadvantages you should consider.
Cost: Hard money loans also come with added costs such as origination fees, closing costs, and even loan-servicing fees.
Short Repayment Period: Hard money loans are intended to get a property ready for resale as fast as possible. For this reason, these loans come with shorter repayment periods compared to traditional loans.
Next Steps
Hard money financing for Real Estate has become commonplace in the Multi-family Housing sector. If for nothing else, hard money loans give Multi-family investors an edge over those still using traditional financing methods.
The good news is that the market for both short-term and long-term Multi-family financing is large, and investors are spoilt for options. It would be wise to make sure you understand all the terms and fees before signing any papers.
If you're weighing hard money against a traditional mortgage or HELOC (a line of credit secured by your property), talk to someone who knows both sides of the deal. We'll walk you through what makes sense for your timeline, your property, and your plan.
