The idea of purchasing real estate with a hard money loan is usually bandied about by investors with less-than-stellar credit scores, since the latter is the primary attribute in determining the particulars of a traditional loan. However; this isn’t always the case, as hard money loans are simply a viable way to get financing. The primary difference is that in the latter, you get the money, pay interest (as well as a one-time administration fee) and the actual property itself is used as collateral.
What Are the Benefits of Hard Money Loans?
There are quite a few of them for the serious real estate investor with poor credit (although good credit-holders can benefit from the following, as well):
A big advantage over securing a hard money loan is the relative speed of the process – the lender doesn’t care to peruse through your credit history or find out about outstanding debt since the physical asset is the collateral; as such, you could have your money in just a handful of days.
You can get the entire purchase price of the asset, instead of worrying about finding the funds to put down the 5% – 20% required for more traditional loans. The lack of a down payment makes paying the administration fee much easier.
This type of loan greatly lessens the usual barriers to entry involved with real estate. Since you don’t need any money of your own, you don’t have to delay your dreams of property ownership. Starting out with this kind also makes it easier to obtain bank loans in the future for other endeavors.
What Are the Cons of Hard Money Loans?
Most of these are more akin to risks – which are only somewhat mitigated by the pros listed up above:
Since the property is what is backing the loan, there’s a chance you could flat-out lose it. Of course, this is lessened greatly by doing your due diligence beforehand; make sure you can maintain the monthly interest payments through to the end.
The administration fee (also called the origination fee) for the loan may be high; but again, in the case of a traditional loan, you would be responsible for the much higher 5%-20% down payment in addition to a loan origination fee.
This is the biggest drawback of a hard money loan: the term length. Mortgages for traditional loans can span up to 30 years; however, a hard money loan may be months or a few years. This of course necessitates much higher monthly payments.
Contact Fortis Funding today to learn more about bridge and hard money loans for your commercial projects.