A Guide for Real Estate Investors and Homebuyers
Ever hear the term "hard money loan." What exactly is a hard money loan? And who are they for?
Hard money financing can be different from traditional bank loans. Because Peregrine Financial has connections with hard money lenders and knows all about hard money lending, we wanted to explain the basics, benefits, and the types of borrowers who may benefit the most from a hard money lenders' offer.
Understanding Hard Money Personal Loans
A hard money loan is a short-term loan secured by real estate. Unlike traditional mortgages, which are issued by traditional lenders' (like banks and credit unions which base financing on creditworthiness and financial history), hard money loans are provided by private lenders and are primarily based on the home's purchase price. They are a popular choice for borrowers who may not qualify for conventional financing.
Who Are Hard Money Loans Good For?
Hard money loans are not for everyone. Here are some of the most common situations where a hard money loan makes sense:
Real Estate Investors
Real estate investors, particularly those involved in fix-and-flip projects, frequently use hard money loans. Because the loans are asset-based and have faster approval times, investors can quickly work with a real estate agent to see a property, get funding to purchase the dilapidated property, renovate tit, and sell tit for a profit. The short-term nature of hard money loans aligns well with the fast turnaround time that fix-and-flip investors require.
Borrowers with Minimum Credit Score Challenges
If a borrower's credit score is low, or they have a financial history that doesn’t meet traditional lending standards, securing a conventional mortgage can be difficult. Hard money lenders focus more on the value of the property rather than the borrower’s creditworthiness. Hard money lenders may not even require bank statements or proof of credit history to give financing.
Buyers Who Need Quick Financing
Traditional mortgage approvals can take weeks, sometimes even months, because of extensive paperwork and the entire underwriting processes. Hard money loans, on the other hand, can be approved and funded within a few days.
If you need to move quickly on a real estate transaction — such as purchasing a property at an auction or competing in a hot market — a hard money loan can provide speed and flexibility.
Developers and Builders
If you're looking to develop land or build a new property, a hard money loan can provide the funding when traditional financing isn’t an option. Traditional lenders may be hesitant to finance undeveloped land or construction projects due to the higher risk involved, which make hard money loans a more attractive alternative for builders.
Business Owners Using Real Estate for Expansion
If you own a business and want to purchase or expand your commercial real estate portfolio, a hard money loan may be an option if you don’t meet the strict requirements of a traditional business loan. Because hard money loans are asset-based, they can provide a more flexible solution for business owners looking to secure property without relying on their business credit.
Pros and Cons of Hard Money Loans
Like any financial product, hard money loans have advantages and drawbacks.
Pros:
Faster approval and funding process for a real estate project
Flexible qualification requirements
Asset-based lending instead of credit-based underwriting or need for financial documentation
Useful for short-term real estate investments
Can help borrowers who don’t qualify for traditional financing
Cons:
Higher interest rates compared to conventional loans
Shorter loan terms, typically 12 months to a few years
Higher fees and closing costs
Risk of losing the property if unable to repay the loan
How to Qualify for a Hard Money Loan
While hard money loans have more flexible qualification requirements, there are still some key factors lenders consider:
The value of the property being used as collateral
Your down payment or equity in the property
Your experience with real estate investments (for investors)
Your repayment strategy or exit plan (such as selling the property or refinancing into a traditional loan)
Hard Money Loan Originators
For more information on repayment terms, specific business purposes, and the application process of a hard money loan, Peregrine Financial is here to help. Our expert mortgage loan officers in Santa Clarita can help you find the exact solution for you.
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