Investors that want a quick and easy solution to purchasing distressed properties prefer to use real estate loans. There are so many other reasons why people like to invest in real estate. It can be to create a vast portfolio of real estate properties or just to have the perks associated with owning your very own investment property.
Becoming a landlord or selling rehabbed properties is a great way to create passive income for yourself, but you will need a considerable amount of cash to do that.
If you are interested in investing in real estate and you need more information on real estate loans, you came to the right article. We will go over the different types of real estate loans and their pros and cons!
1. Learn about Real Estate Loans
Real estate loans are loans you can obtain from a reputable lending company to purchase your investment property.
When looking to invest in real estate, hard money loans are a great option if you do not qualify for traditional lending. Real estate loans are also great options if you are looking to flip a house.
2. Review Traditional Real Estate Funds
Traditional loans refer to loans that you obtain through a conventional bank or credit union. These types of real estate loans may have a credit score requirement that you must meet before a lender extends the loan. Although a great majority of investors qualify for this option, they usually don’t go through traditional means of lending.
These conventional private loans are notorious for being more expensive and contain fewer benefits because lenders see these loans as higher risks.
When evaluating your application, lenders will look at your income, debt, credit history, assets, and down payment. Not only does this way of lending have stricter requirements, but it is also lengthier than other types of loan options.
3. Consider Hard Money Loans
Hard money loans are excellent options for commercial real estate loans. A Hard money lender approves a potential borrower based on the value of the property they want to purchase, not based on their creditworthiness.
Hard money lenders may briefly look at your credit and your finances, but they are mainly concerned with the property you want to purchase.
The process of obtaining a hard money loan is a lot less rigorous than traditional lending, allowing borrowers to have quicker access to their real estate investment funds. Most borrowers have access to their money within a matter of days instead of having to wait weeks or months to receive funding.
4. Review Hard Money Rates
Because hard money lenders release these funds based on the property’s value, they are taking on a more significant risk on behalf of the borrower. To make up for this risk, hard money business real estate loans have higher interest rates. These types of lenders may also require the borrower to put down a much larger down payment than usual.
This usually isn’t always the case, but most borrowers can expect to put down 20% of the property’s price. Hard money loans also have shorter repayment times. Compared to traditional loans that give borrowers between 15 and 30 years, hard money loans give borrowers only a few years to repay.
The short repayment time should not be an issue if you can quickly get the property back on the market. You can use the proceeds from your sale to pay off your hard money loan.
5. Should you use a Hard Money Loans?
Real estate investors find hard money loans to be a great tool to use when they find an excellent fixer-upper house that would turn out to be a fantastic flip. House flip projects happen very quickly, so most property investors prefer quick funding.
Hard money loans are also great for borrowers who find unique properties that don’t qualify by traditional lending means.
Entrepreneurs also prefer to use hard money loans because of commercial loan limits. A borrow may be eligible for traditional lending, but the amount they are qualified for may not be enough to purchase the property they want.
6. Explore Real Estate Loan Alternatives
Other than hard money loans and traditional lending options, you may be able to use other types of lendings. Peer-to-peer lending and seller financing are other options that you may want to check out.
7. Look Into Peer-To-Peer Lending
Peer-to-peer lending allows borrowers to borrow money from a group of investors or other individual investors. These investors will also receive a return on their investment from the sale of your property. Peer-to-peer lending platforms use a specific type of software that matches you with potential lenders.
If you are interested in peer-to-peer lending, you will have to submit an application to these platforms for the lenders to review. They will need to conduct a credit check, and they have the ability to determine your interest rate if they approve your application.
If your credit is not up to par, the lenders may charge you a high interest rate to compensate for your score. If you are okay with sharing your proceeds with other investors, then this route may be good for you.
8. Review the Seller Financing Route
Seller financing is another option available for you if you can create a deal directly with the seller of the house. In this type of agreement, the borrower will make direct payments to the home seller instead of obtaining a loan to purchase the home.
This method usually works if the seller is in a hurry to sell the property. Although this is a great option, it may be hard to find a homeowner willing to enter into this type of agreement.
9. Consider Hard Money Loan Pros
Because hard money lenders don’t pay too much attention to your credit history, many people assume that hard money loans are only reserved for those with bad credit. This assumption is entirely incorrect as many investors with great credit use hard money loans as well.
Quick Approval Process
As mentioned earlier, the process to receive your hard money loan is pretty quick and easy. In most cases, hard money lenders can approve your request within 24 hours.
Most lenders not only look at the value of the property you wish to purchase, but they also look at your experience in the real estate industry.
These lenders also want to know what your exit strategy is for the property. Once the lender determines that you will handle the monthly payments for the loan, they will release the loan.
10. Consider Hard Money Loan Cons
Although hard money loans have several great benefits, there are a few cons that you will need to keep in mind before you apply for a loan. As stated earlier, these loans do come with higher than average interest rates.
Most borrowers see that their interest rate ranges between 8% to 11%. Although these rates may seem unattractive, they aren’t that bad if you can sell your property quickly.
If you default on your loan, you could face a possible foreclosure on your property. Most lenders don’t want to take back the house if you are in the middle of a rehab project, so it is always best to communicate your concerns if you feel you may default on the loan.
Most lenders will work with you to create a plan that works best to complete the project. Not communicating with your lender increases your risk of losing your property.
The average hard money loan repayment time is one year. You will need to complete your flip, sell the property, and pay back your hard money lender within this year. More often than not, borrowers will need to request an extension for their loan.
Most lenders are okay with granting extensions, but they won’t extend your loan for free. Your lender will outline the cost of this fee in your agreement if they allow for extensions.
11. Beware of Predatory Lending
Peer-to-peer lending and hard money loans are a few of the many loans that the FDIC does not regulate. Before you sign any contracts, make sure that you do your research on the lender.
While most hard money lenders are legitimate, there are a few that are predatory types of loans. Predatory lenders are companies that impose fair and deceptive loan terms designed to keep the borrower in debt.
Learn More About Real Estate Loans
Real estate loans, specifically hard money loans, are great tools to use if you want to build up your real estate portfolio.
Hard money loans come with minimum requirements and quick turnaround times that many investors love. If you found this article helpful and are looking for more information on real estate loans, check out our “Business” section today!