A hard money loan (also called ‘short term’/’private money’/’rehab’/’fix and flip’ loans) means borrowing money used for the fix and flip project by mortgaging the property that you plan to flip. You use the property as collateral.
These types of loans are done quickly because they are relevant in fast-paced industries. When investors come across a flippable property, they want to secure it before anyone else does. Because of this time-sensitive work, closing a hard money loan is typically done very fast.
The money doesn’t come from a bank or traditional lender, it comes from a private source. The repayment period is speedy (12-18 months) because the point of fix and flip properties is getting them back on the market. After the property sells, the investor pays back the loan and keeps the profit.
Approval for this type of loan is more lenient than a traditional loan because of its short-term qualities. Instead of looking at an investor’s financial history, lenders instead consider the potential of the property, and their past success rate.
When to Implement Hard Money Loans
- Fix and Flip Properties: When it comes to fix and flip properties, the faster the money comes, the better. It’s a competitive market, and you must move fast to get ahead.
- Low Credit Scores: Hard money loans don’t value high credit scores as much as traditional loans do. Instead, they look at the property in question because that’s the security they’re looking for.
- In a Rush: Whereas traditional loans take between 30-40 days to get approved, hard money loans only take about 10 days. They don’t look into as many aspects as traditional loans do, therefore they don’t take long to disburse.
Getting pre-approved for a hard money loan is quick, easy, free, and necessary. Getting pre-approved is your foot in the door to the world of fixing and flipping properties. Once you’re approved, you can take advantage of everything loan-related.
Requirements for a Hard Money Loan
- Location: Lenders usually want someone in close proximity to their place of business because they’re privately owned.
- Documentation and Paperwork: There’s not as much paperwork involved for a hard money loan as there is for a traditional loan, but things such as credit score, discussion of flipping experience, tax returns, and bank statements are still called for.
- Experience = Lower Rates: Someone just starting out in the fix and flip world has the propensity to be offered a higher rate than someone who’s been at it for a while. This comes back to the accountability factor. Once you’re a veteran in the business, your rates will be lower.
- Property Type: Whether or not you are eligible for a hard money loan hinges on the type of property you plan on working with. This varies between private lenders, so do your research.
Monthly repayments are interest-only or interest combined with a principal amount; such terms vary between lenders.
Research is the name of the game. When it comes time to secure a loan for a fix and flip project, make sure you borrow from someone who is trustworthy and willing to work with you in a fair and communicative manner.