Buying Real Estate With A Hard Money Loan

Posted on: 25 July 2018

If you can't get a conventional loan, there's another option. You can buy real estate with a "hard money" loan. Hard money loans are loans based on the equity of the property, so you don't need to have a good credit score or a solid financial history. However, there are some catches.

Hard Money Lending is Usually for Commercial Enterprises 

Hard money lenders want to get their money back faster than a mortgage company. Often, the idea is that you'll take out a loan and pay it back once you've flipped the property or once you've started renting it out yourself. Hard money loans are therefore for landlords and house flippers more than residential owners.

That's not to say there aren't residential loans. Some hard money lenders do specialize in what are essentially sub-prime mortgage loans. You will have to find an investor who is willing to do this, which may take some time.

Hard Money Lending is On Agreed Upon Terms

In the mortgage business, everything is highly regulated. A hard money loan is not a traditional mortgage. Thus, the terms that are agreed upon can be very different from a traditional mortgage loan. In general, the interest rates are going to be higher. However, there may be "soft" advantages to getting a hard money loan.

If you're looking to invest in real estate as a business, hard money loans often come with some degree of mentorship. An investor is interested in your success and wants to see your business grow. Consequently, they're not only lending you money, but also providing you with valuable advice.

Hard Money Loans May Improve Negotiations

A hard money loan is often more similar to purchasing a house with cash than purchasing it with a mortgage loan. When you purchase with a mortgage lender, they want to make sure the house meets certain criteria. That means that a deal can fall through last minute, which makes many sellers wary. When you're buying a home with a hard money loan, you have a little more wiggle room.

That also means you can purchase properties that need a lot of work, which is what makes hard money loans so valuable to house flippers.

Hard money loans are more versatile than traditional loans, but you are going to need to find an investor who is willing to lend you the money. In many respects, this is a business deal more than a mortgage, and the contract will be similar.