Hard money lenders have been around as long as there has been a real estate market. There are a lot of benefits that come with hard money loans. Investors that are just starting out might tell you that hard money loans are not a great idea. On the other hand, the more experienced investors say otherwise. It is not as risky as some people say. The difference between hard money loans and other types of loans is that it does not need the standard underwriting requirements. This way, investors can buy properties and renovate them extremely fast. With hard loans, there is no need to wait. They are usually approved quicker than other types of loans. This is important as it can allow you to get ahead of the competition. Furthermore, hard money loans also differ in one more way compared to other types. The amount you get in a hard money loan is not based on the current value of the property. It is based on the value after the renovation is over. With that said, let us go over the benefits of getting hard money loan in Florida.
Hard Money Loan Requirements
As we mentioned previously, hard money loans are much easier to get compared to other types of loans. The process of getting a hard money loan is not as long. Hard money lenders do not look for as many requirements as banks, for example. In most cases, where the hard money lenders will give you a loan, a bank will not. There are a few things hard money lenders are looking for. First, they require a percentage of equity that you have in the property. Second, you will need to have cash on hand so they can be sure you can make the monthly payments. The last thing they need will be a few exit strategies just in case. If you can provide these three things, you can get a hard money loan in no time.
Compared to a bank that has a long list of requirements and a long waiting time for loan approval, hard money loans are much better. You will have to have an exceptional credit score before the bank even considers giving you a loan. Not to mention issues such as bankruptcies, loan modifications, and short sales. All of these can prevent you from getting the loan that you need. Also, if you have more than 4 mortgages, the bank will straight up deny your request. With all those limitations and many more, bank loans are not as popular with investors. On the other hand, hard money loans are more popular and, more importantly, more suitable. Because of that, investors opt to get them in most cases.
Best Option in Most Situations
When banks and other institutions alike refuse to provide you with a loan for your project, do not worry. Private money lenders will provide you with a hard money loan so you can continue with the project you planned. When an investor needs a short-term loan, let’s say 1 year, it will certainly be rejected by traditional lending institutions such as banks. A period of 1 year is too short for a bank. Banks usually operate with loans that span over a longer period of time with cheaper rates. This is because of their business model, which does not suit short-term loans. Additionally, it also depends on the project you are working with.
The most popular type of project investors work with is the Fix-and-Flip strategy. Fix-and-Flip projects are the fastest method for an investor to make a profit. The strategy here is that an investor buys property by using a short-term hard money loan. This way, they can renovate the property really fast and put it up for sale. The plan is for the property to be sold within a year, thus making a large profit for the investor. Because of this, banks will have no interest in lending you a loan. If the bank turns you down, you can always turn to private money lenders. Usually, hard money loans are much quicker than conventional loans. In most cases, it takes less than a week to process a hard money loan. Furthermore, if you are in a hurry or you have an emergency, hard money loans can save your project.
Risks of Hard Money Lending
There are several risks that come with hard money lending. First, the interest rates are always higher compared to other types of loans. This is due to the risk that the lenders take on by giving you a loan. Next up, as we mentioned before, hard money loans are used only for the short term. Yet again, this is because of the risk. The longer the period, the bigger the risk for the lender. Lastly, you will have to put a down payment of at least 20 to 25% of the property value.