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Hard money loans offer a solution to real estate investors who may not qualify for a conventional loan, such as a mortgage. They are not without special considerations, which we will discuss in this article.

What are Hard Money Loans?

Hard money loans are a type of short-term financing typically used by real estate investors to purchase properties quickly. Unlike traditional loans, which are based on the borrower’s creditworthiness and income, hard money loans are secured by the value of the property itself. This means that the lender focuses more on the property’s potential for profit rather than the borrower’s financial history.

Hard money loans are given by private lenders as opposed to banks or other financial institutions.  

Hard Money Loan Requirements

One of the primary appeals of hard money loans is their lenient eligibility requirements compared to traditional loans. While banks may scrutinize a borrower’s credit score, income, and debt-to-income ratio, hard money lenders are more concerned with the property’s value and the borrower’s equity stake in it. 

As a result, borrowers with poor credit or who lack sufficient income history may still be able to qualify for a hard money loan as long as the property being purchased has sufficient value.

Ultimately, hard money eligibility will be evaluated on a case by case basis. However, you can expect to need the following:

Hard Money Loan Rates and Terms

Hard money loans typically come with higher interest rates than traditional loans due to their short-term nature and the increased risk for the lender. Rates can range anywhere from 7% to 15% or more, depending on the lender, project type, and the specific terms of the loan. 

Repayment terms for hard money loans are usually shorter than traditional loans, typically ranging from three months to three years. Some lenders may offer interest-only payments during the loan term, with a balloon payment of the principal due at the end. Others may require monthly payments of both principal and interest.

How Quickly Do Hard Money Loans Close?

Again, one of the best parts of a hard money loan is how quickly you can secure one. Private lenders that do not require all the paperwork needed for a conventional loan translates to rapid-fire decisions–often in as little as a few business days. This can make all the difference in the world of real estate, where time is of particular essence. 

What Projects Are Best for a Hard Money Loan?

Hard money loans are well-suited to projects that need to be financed quickly and offer a profit for both the lender and the investor. This includes:

Fix and Flip Loans

Hard money loans work well for well-selected fix and flip properties. The borrower uses the hard money to quickly close on a property with high potential. They may also use the loan to finance renovations on the property. Once the property has been repaired and updated, the borrower sells it for a profit and uses it to repay the hard money loan.

Buy and Hold

This investment method is also called Buy, Rehabilitate, Rent, and Refinance, or BRRR. It involves using a hard money loan to secure a property and renovate it for the purpose of renting it out. The borrower will presumably secure long-term financing via a traditional mortgage, at which time they will repay the hard money loan.

Bridge Loans

Hard money loans can be used, in general, as a means of bridging the gap between acquiring a property quickly while awaiting long-term financing. This extends to all sorts of projects, including commercial property acquisition, new construction, and land purchases.  

Choosing a Hard Money Lender

The main thing to look for when choosing a hard money lender is transparency. Yes, these are high-risk loans that come with higher rates and faster repayment terms. But none of this should be a surprise to you. When you discuss the specifics of your loan, your hard money lender should offer clarity and be completely up front with expectations regarding rates and repayment.

Hard Money Loans in Colorado

Pinetree Financial Partners is proud to be one of  Colorado’s top hard money lenders. We work with investors on all types of projects. Whether it is your first fix and flip or you are diversifying an already-seasoned portfolio, we are here to help. Call or go online today to schedule a consultation or get a free quote. 

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