For many people looking to buy a home, a traditional mortgage will provide the best way to raise the necessary funds. Although it is usually preferable to pay cash wherever possible, few Americans have the necessary money lying around to cover the full expense of a home purchase. With their low interest rates and long terms of repayment, traditional mortgages usually fit perfectly with the goal of home purchasers to live in a nice place without having to save for 10 or 20 years in order to do it.
But there are other forms of loans available to use in the purchase of real estate. One of those is a hard money loan. Hard money is a type of loan that is often preferred by real estate investors to use on short-term projects or to act as bridge financing until a lower-cost, long-term mortgage-type loan can be arranged. Hard money loans have some special features that can make them very attractive for real estate investors. However, hard money lending is largely unregulated, meaning that caution should be taken for investors who are not familiar with real estate investing.
Hard money loans can make the difference in competitive markets
Hard money loans are strongly favored by real estate investors who specialize in adding value to homes by buying them, improving them and then quickly selling them. However, any real estate investor operating in a competitive or even moderately tight real estate market can potentially benefit enormously from the use of hard money.
In markets where the average home or other piece of real estate sits on the market for less than two months before selling, hard money loans can make the difference between getting deals and losing them. Traditional mortgage financing often requires up to three months to secure, causing sellers and their agents to shy away from deals that hinge on mortgage approval in competitive markets.
On the other hand, hard money borrowers can often have cash in hand by the end of the week. In some cases, hard money borrowers who have established long-term relationships with lenders may be able to get the purchase price wired to the seller by the end of the business day. This can make hard money loans as good as cash for purposes of closing deals.
Hard money loans can save huge on out-of-pocket expenses
Another big benefit of hard money loans is that they can seriously reduce out-of-pocket expenses for investors. This is a particularly attractive feature for investors who buy properties needing extensive repairs. On a typical $100,000 purchase, financing with a mortgage loan will often entail up to $30,000 in cash outlays. If the home requires $20,000 worth of improvements, that means the investor will need to cough up $50,000 in hard cash.
On the other hand, with a hard money loan, that same deal may only require around $25,000 in cash. In some cases, borrowers who have long-term working relationships with hard money lenders may be able to get those costs down even further. This can allow investors, such as those looking to fix and flip, to maximally leverage their available capital, further ensuring that they will be able to take advantage of all market opportunities.
Hard money loans are incredibly flexible
Hard money loans are almost like corporate finance in their ability to take on nearly any structure. This near-infinite flexibility comes from the fact that such loan agreements are usually just negotiated deals between two private parties. On the contrary, mortgages are highly structured, protocolized loans that are typically sold by the thousands each year. Large banks are unlikely to make any kind of exception or be willing to bend internal lending rules in order to appease a borrower.
Ray is a manager at ECA Tech Inc. , Toronto's top Ecommerce software, website development and digital marketing company. He has 23 years of experience in the field of Ecommerce website, software and app development. Ray volunteered in numerous IT related free training courses all over North America and contributes articles on numerous blogs.