Should I be using Hard Money?

[Darionn James-Trigg]

Investing in real estate can be expensive. But what if I told you that you didn’t have to use all of your money to fund a real estate investment. That’s where hard money comes into play. When looking for fix and flips or potential rental properties, purchase prices and rehabs can seem too pricey for some.

Hard money is an asset-backed loan, which means you don’t need a 750 credit score, two or more years of employment, or a debt to income ratio 36% or lower like traditional lenders require. Hard money lenders lend based on the value of the property you are purchasing, if you default they will foreclose on the property and recover their money. Hard money lenders may take a quick peek at your credit or finances, but much less rigorous than a traditional bank or mortgage company would.

Since hard money lenders do not dive deep into your credit or finances, they are of course taking on more risk. To combat that risk, hard money loans typically come with higher down payments and higher interest rates in comparison to traditional loans. So why get a hard money loan, especially when rates are historically low?

1. 1. Faster approval process

• -Traditional financing can take 30-45 days, hard money lenders can fund as quickly as a week.

1. 2. Approval based on property value, not your credit history.

• -Hard money lenders care about the value of the property more than they care about your credit score or debt to income ratio.

1. 3. Flexibility

• -Hard money lenders are sometimes individuals or private lenders, which means they have more flexibility over terms and interest rates. Traditional lenders typically have more strict guidelines to follow.

But there are a few drawbacks to using hard money…

1. 1. High Interest Rates

• -Hard money rates are typically over 10%, which is much higher than a FHA loan that is as low as 3.5% .

1. 2. Larger down payments

• -Hard money lenders take on more risk since they don’t dive deep into your financial history, which means they want more skin in the game from you for security.

1. 3. Short Terms

• -Loan terms are not 15 years or 30 years as with traditional. These terms can be as short as 6 months.

1. 4. Riskier than traditional

• -With the high interest rates and short terms, you could end up being under water if you do not manage your project correctly. Buy with hard money, fix it up, and refi or sell the property as soon as possible.

1. 5. May need proven track record

• -Some lenders would like to see that you know what you’re doing before they lend you money. This varies lender to lender so be sure to verify.

In conclusion, hard money can be a viable option for investors looking to leverage their cash, be able to buy more properties faster, or for those who can qualify for traditional financing. Be sure to have all ducks in a row before applying for hard money, you can easily end up underwater and foreclosed on if you mismanage your project.

Feel free to leave comments. Have you used hard money before? Did you know this was an option?