Real Estate Tips |7 min read

How Does a Hard Money Home Renovation Loan Work?: 5 Types

by Maryland Hard Money Lenders

The hard money home renovation loan is a popular financing strategy for real estate investors. It allows you to pay for value-boosting property enhancements virtually immediately—and it comes with tax deductions, at that. Learn more below.

Main Takeaways

  • Hard money home renovation loans are asset-based loans you use to redo, repair, or fix and flip a property.
  • These loans have accelerated funding, flexible criteria, various tax deductions, and other benefits.

Table of Contents

 

How Do Home Improvement Loans Work?

A hard money hard money home renovation loan is a secured loan you can use to repair or redo a property. Or, as a provider of Maryland fix-and-flip loans, we also often see it used to undergo house flips.

With these asset-based loans, you receive the funding at a much faster rate than traditional renovation loans. Then, you repay it in similarly fast, fixed monthly increments with interest.

As an aside, the term “hard money home renovation loan” doesn’t refer to a specific type of loan. It simply describes how you use your loan after getting it. So, in other words, any loan category you use to remodel a home can fall under the “hard money home renovation loan” label.

How is a Hard Money Home Renovation Loan Used?

You can use a hard money home renovation loan on just about anything related to renovations. For example, you could redo the bathroom or the kitchen. You could repair your basement ceiling, cracked flooring, or any other areas that require attention. It’s possible to even use them as emergency reparation funds, like after a storm, accident, or other unexpected life events.

Basically, if you need to maintain or add to the value of your property, a hard money home renovation loan can help.

What Will Lenders Consider When Borrowers Apply?

Hard money lenders consider your income, credit score, debt, and other factors that other lenders commonly consider.

However, they work differently from other lenders in one key way. The above factors aren’t the only things they’ll weigh when judging you as a borrower. They also weigh the value of your property assets heavily. So, if you have room for improvement in the typical areas, that shouldn’t deter you from applying for a hard money loan.

Home Renovation Loan Types

Now, let’s delve into the various types of hard money home renovation loans. There are 5 to remember:

Construction Loans

People use construction loans to finance the building of properties, both new properties and additions to existing ones. They receive money at different stages to use for renovations at each stretch of the project.

Speculative Construction Loans

Speculative construction loans are just like typical construction loans. However, they’re different in one core way. Unlike regular construction loans, speculative ones fund new properties you believe could someday make a profit. However, you don’t have specific plans for them yet.

Investment Property Loans

Investment property commercial loans are made for for-profit properties. To explain, these renovation loans are intended for properties that you and your business don’t plan to use yourselves. Instead, these loans are meant for renovations of properties that others will pay for the use of.

Bridge Loans

Bridge renovation loans exist to give you interim financing until you attain longer-term financing. They typically last for a few months or a few years, but not much more.

Cash-Out Refinancing

Cash-out refinancing lets you use your home equity (ownership stake) to fund your home improvement projects. In essence, you exchange your old mortgage for a new one. In the process, you recover the difference between your old and new hard money home renovation loan in the form of an upfront lump sum.

Additionally, while your replaced mortgage will be bigger than your older one, you can earn lower interest rates and monthly mortgage payments with it than your old loan. To boot, the interest rates can be better than other loan types on this list.

Note that you should only consider this loan when mortgage rates are going down.

How to Get a Hard Money Home Improvement Loan

  1. Determine Your Needed Amount: Carefully calculate how much money you require for your project, as well as how much you can afford to borrow and later pay off.
  2. Pre-Qualification: You can ask your prospective lender to go through a pre-qualification process. Briefly, they will go over your financials and estimate your possible terms and rates. This can give you a snapshot of whether or not you’d be approved if you formally try. Furthermore, it won’t impact your credit score.
  3. Make Sure Your Credit Score Meets the Cut: Many hard money lenders want your credit score to be in the 500s to qualify.
  4. Compare Your Options: Consult your hard money home renovation loan provider on the differences between various loan packages. For example, compare the interest fees, closing fees, and other fees of each loan type. This way, you can narrow down the pros and cons to find the best option that works for you.
  5. Apply: Provide your income info, tax returns, and other financial documents to your lender.
  6. Let Your Lender Crunch the Numbers: Hard money lenders like us strive to give you results within 48 hours. This way, you can know where you stand and put your plans into action more quickly.

Relevant Tax Benefits

One huge deal many people don’t know about is that your hard money home renovation loan may be eligible for tax deductions. As long as you’re directly responsible for your loan, using an official lender for business purposes, those interest costs could be tax-deductible.

The Benefits of Getting a Hard Money Home Renovation Loan

Doing renovations with a hard money home renovation loan has numerous benefits. Here are some of them.

  • Build Your Credit: If you pay all your loan payments on time, it could boost your credit score.
  • Increase Your Property Value: By adding home improvements, you can enhance its market value.
  • Fast Funding: By nature of hard money loans, you can receive them within weeks.
  • Higher Loan Amounts: You may be able to borrow higher loan amounts than you can with other forms of financing.
  • Tax Deductions: As discussed earlier, you may be eligible for interest tax deductions on your loan interest.

Cons of Home Improvement Loans

Of course, home renovation loans have some cons that you should keep in mind. This way, you can make a well-rounded, informed decision.

  • Is Property-Based: A hard money hard money home renovation loan requires that you use your property as collateral. So, if you cannot get your finances together, you may pay the price.
  • Has Fees: Like many loans, renovation loans come with service fees. These can include origination fees, closing fees, and other routine costs.
  • Higher Interest Rates: Because a hard money renovation loan is expedited, is designed with more flexible criteria, and is privately lent, all those premiums come with convenience fees. As such, you may pay higher interest rates in exchange for these benefits.

Fund Your Renovations with MHML

Hard money home renovation loans are asset-based loans you use to redo, repair, or fix and flip a property. These loans have accelerated funding, flexible criteria, various tax deductions, and other benefits.

If you want to kickstart your renovations, we can help you get it done. Maryland Hard Money Lenders was founded by Patrick Freeze, a real estate professional with over 15 years of experience in the industry. Furthermore, our locally-based team has the experience and expertise necessary to help your renovations go from possibility to planning.

What’s more, we can help you get it done more quickly than you could undertake alone. Contact us today to gain a team member in your renovations.

 

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