5 Different Ways to Use a Hard Money Loan
Have you ever wanted to invest in a property but don’t necessarily qualify for a traditional loan? How about wanting to secure a deal faster than a traditional loan can be approved? This is where hard money loans come in handy. Today, we’re reviewing what a hard money loan is, different ways to use a hard money loan, and when you shouldn’t use one for your investment property.
Contents of This Article:
- What Is a Hard Money Loan?
- 5 Different Ways to Use a Hard Money Loan
- When Shouldn’t You Use Hard Money?
- How to Find the Right Lender for You
What Is a Hard Money Loan?
A hard money loan is a short-term, asset-based financing option backed by real estate. Unlike traditional bank loans, which rely heavily on a borrower’s creditworthiness, hard money lenders care more about the value of the property used as collateral when approving funding.
Since lenders don’t spend too much time looking into a borrower’s financial history, loans can be processed and funded quickly–often within just a few days. That said, hard money loans are designed for short-term use, typically ranging from 6 months to 3 years, and they come with higher interest rates, usually between 8% and 15%.
Typically, investors use hard money loans for fix-and-flip projects, bridge financing, or other real estate ventures that require fast access to capital. However, there are several ways to utilize hard money. Read along to learn five different ways to use Baltimore rehab loans.
5 Different Ways to Use a Hard Money Loan
If you don’t qualify for traditional financing but want to add to your real estate portfolio, you have plenty of options. Hard money loans offer flexibility and fewer requirements than traditional bank loans, making them fast and efficient. Here are five different ways to use a hard money loan to add to your investment portfolio.
- Fix-and-Flip Projects
- Bridge Financing
- Rental Property Purchase
- Construction Loan
- Cash-Out Refinancing
Fix-and-Flip Projects
Hard money loans are ideal for house flippers who need fast funding to purchase, renovate, and resell properties for a profit. Unlike traditional lenders, hard money lenders focus on the after-repair value (ARV) of the home rather than the borrower’s credit history. This allows investors to act quickly, securing properties, completing renovations, and selling before the short loan term is up.
Bridge Financing
Another good way to use hard money is for bridge financing. A bridge loan is a short-term financing option that helps investors secure a new property while waiting for long-term financing or the sale of another property. These loans can be used to cover gaps in funding, making them useful when purchasing at auctions, buying commercial properties, or transitioning between investments. That said, these loans are nice because they close faster than traditional loans, allowing investors to seize opportunities without any delay.
Rental Property Purchase
Investors looking to expand their rental portfolio can use hard money loans to purchase income-generating properties. Traditional lenders typically require strong credit and have lengthy approval processes, which can slow down deals. However, with hard money loans, investors can secure properties quickly, renovate them if needed, and refinance with a long-term mortgage once it’s producing steady rental income.
Construction Loan
Hard money construction loans provide builders and developers with the capital needed to finance new construction projects. Banks can be reluctant to finance construction, making hard money a decent alternative. That said, these loans can cover land acquisition, labor, and materials, with repayment typically occurring once the project is completed and refinanced or sold.
Cash-Out Refinancing
Finally, real estate investors can use hard money loans to pull equity from an existing property for reinvestment. This can be helpful for investors needing capital for renovations, acquiring new properties, or covering other business expenses. Hard money cash-out refinancing is especially useful when traditional lenders impose strict requirements or when funds are needed quickly for time-sensitive deals.
When Shouldn’t You Use Hard Money?
Hard money loans aren’t ideal in every situation. While they offer quick access to capital and have more flexible criteria, their short repayment terms and high interest rates aren’t right for all borrowers. Here are a few scenarios when you should avoid using a hard money loan.
- You Need Long-Term Financing
- If You Qualify for a Traditional Loan
- You Don’t Have an Exit Strategy
You Need Long-Term Financing
Hard money loans are designed for short-term financing, typically lasting anywhere from 6 months to 3 years. So, if you’re looking for a loan to finance a property over several years, a traditional mortgage is probably a better option. Additionally, hard money loans have higher interest rates and typically require refinancing at the end of the term, which can be risky if you don’t have another financing plan lined up.
If You Qualify for a Traditional Loan
If you have good credit, steady income, and meet the bank’s lending requirements, a traditional loan will offer lower interest rates and better repayment terms. Hard money loans have high interest rates, whereas conventional loans have rates between 3% and 7%. Using a hard money loan when you qualify for traditional financing leaves you unnecessarily paying much more in interest and fees.
You Don’t Have an Exit Strategy
A hard money loan requires a clear plan for repayment, as they’re typically due within one to two years. If you don’t have a reliable way to refinance, sell the property, or generate enough income to pay off the loan, you risk defaulting and losing the property. As such, investors should only use hard money if they have a structured exit strategy in place.
How to Find the Right Lender for You
If you’re thinking about different ways to use a hard money loan, know that there are several strategies to explore. However, the first step in getting a hard money loan is finding the right lender. You’ll want to find a private lender or lending company that’s reliable, transparent, and experienced in funding loans quickly.
Maryland Hard Money Lenders has just what you need to start your next real estate adventure. Our team of real estate loan professionals can help you get funded quickly and efficiently. Learn more about our lending process or fill out our initial loan application today!
