Pros and Cons of Purchasing Investment Real Estate With a Hard Money Loan
Buying an investment property with a bank is difficult for some business owners. A traditional lender will need specific conditions met before lending money to you. When you start your business, it may not even be possible to meet the many mandated requirements of a bank.
A hard money loan may be a good option if you don’t qualify for a traditional loan. There may be a lot of pros and cons for this loan type. But if you aren’t ready for a conventional investment property mortgage, you can use a hard money loan to get started.
Purpose
Hard money loans are a type of short-term bridge loan. A bank doesn’t work with this loan program. Individuals or companies will lend your company money using the property to secure the loan. If you default, the lender will collect the collateral.
Pros
Because this lending program is secured by real property, the lender will not look into your finances. The lending company for hard money loans will need to know how much the property is worth.
The process to qualify is nominal, shortening the time to obtain funds. Depending on the lender, you can expect to wait anywhere from a few days to a few weeks before you get your funds.
A hard money loan helps if you just started your business and can’t qualify for a traditional loan. You won’t need huge cash to purchase a property with this loan.
Cons
Your origination fees and interest rates are lower at a traditional bank than with hard money financing. Because this loan type is higher risk, a lender will want to protect themselves.
Short-term loan contracts require you to pay off the property, or you may lose it to the lender. Every arrangement differs for each loan, but the loan terms are much less than a bank’s.
Hard money loans come with high expenses, but the idea is to force you to pay them off as soon as possible. This allows the lender to get out of a potentially risky deal. The longer the loan term, the more difficult to both you and the lender.
Using a traditional lender may not be possible at first. You can use a hard money loan to bridge the gap until you are more established. Once you qualify for a traditional loan, it is best to roll over your hard money loan into a mortgage if you can’t pay it off before the hard money loan is due.