What is a Hard Money Mortgage Loan?
A hard money loan can be defined as a short-term house financing alternative that is used in the purchasing of an investment property. Typically, this form of financing is given to real estate investors for remodeling of rental houses, fix-and-flip projects or just to facilitate the buying process and transfer of real estate.
A hard money mortgage loan is designed explicitly for investment properties, and their primary role is to financing the purchase of a real estate or funding a renovation of a property. The funding is accessed easy and fast than the traditional mortgage because the qualification is flexible. A hard money loan helps fix-and-flip investors and real estate investors to build a strong rental portfolio.
This is one of the best short-term financing alternatives that give the majority of investors the flexibility and speed they need when investing in real estate. Many investors prefer getting a hard money mortgage loan because it requires a fast prequalification, quicktime to funding, a minimal borrower qualifications and they can use the loan to finance a rehab.
In most cases, short-term investors will use their hard money rehab loans to fix-and-flip their real estate property within one year or less. On the other hand, long-term investors usually use the funds to buy and remodel a fixer-upper before refinancing to a traditional montage and rent out the property to tenants.
However, the majority of long-term lenders are portfolio investors, in such a way that they possess several investment properties. For this reason, traditional banks will tend to be reluctant when issuing the conventional loans if the investor is still financing over four mortgages. Because of the limitation of the financial institutions when giving out the conventional mortgage, hard money loans have become more a useful alternative. For this reason, even the buy-and-hold investors find this option helpful.
Additionally, given that hard money mortgages have a fast approval rate and funding times, almost all real estate from all stripes must use the funding to compete with all-cash purchasers at a real estate auction.
Who is a hard money mortgage loan meant for?
Both the short term and long term investors can access this type of funding. Three parties use hard money loans, and they include:
- Buy-and-hold investors
- Portfolio investors
How do the short-term and long-term investors use hard money loans?
Fix and flip investors
These are short-term real estate investors who what to buy, renovate and sell their property within one year. This is one of the best financings for short-term investors since they can be used to buy the house and renovate it at the same time using that single loan. Additionally, the payment duration of the loan is short, and they offer interest-only payment.
For instance, the majority of these investors will buy a house in poor condition, renovate the home and resell it at a higher price than their current market value. With the help of a hard money mortgage, the fix-flip investors can fund the initial purchase and all the required innovation expenses. In most cases, the investors will receive funding that is equivalent to the percentage property’s after-rehab-value, which translates to the fair market value after the investors make all the renovations.
The moment the investor buys the property using the initial finances from the lender, the immediately starts the renovating the property, getting the renovating funds from hard money lenders in stipends or draws. This implies that fix-and-flippers must be equipped with float rehab overheads until they get the resources from the lender. When renovating the house, fix-and-flippers are required to pay their lenders interest-only payments.
These are those investors who obtain the hard money loan to purchase and renovate rental apartments. In most cases, the buy-and-hold investors will obtain the hard money mortgage loan when their rental property is in bad shape such that it cannot be used to obtain a traditional mortgage. It is because the majority of traditional banks will never issue a conventional loan for apartments in deteriorated conditions. Nevertheless, decrepit apartments come with their upsides for long-term investors the same way they do for short-term investors.
To avoid this financing problem, long-term investors try to seek help from hard money lenders to obtain rehab loans to finance the initial purchase and renovation of the property. The moment the renovation is done, long-term lenders can rent out the homes and refinance the renovated home with a conventional mortgage and later use the finances to repay the hard money mortgage.
In most cases, a buy-and-hold investor who is eligible for permanent funding will require access to the funding immediately, especially when they are competing with all-cash purchasers at real estate auctions. In the said scenario, the long-term investors depend on the hard money mortgages for a fast approval process and a quick funding time.
These are those long-term investors who obtain the hard money mortgage loan to invest in several properties at the same time. Even though these type of real estate investors prefer traditional mortgages, the majority of financial institutions and lending organizations give out between 4-10 conventional mortgages to one person.
Therefore, in case a portfolio investor meets the traditional mortgage limit, they will need to use other options such as purchasing a house all-cash, get a blanket mortgage or use hard money mortgage. For the reason that the majority of these investors are extremely levered to start with, they usually depend on hard money loans to purchase more properties.
This implies that the investor will use the hard money mortgage loan to buy the houses irrespective of their condition. If the apartment is in bad condition, the hard money lenders will give out the loans as a percentage of the apartment’s after-rehab-value. On the other hand, if the house is of good condition, the lenders will give out the mortgage as per the fraction of the house’s loan-to-value ratio, that is the same as the limits set by the traditional loans.
The things you need to know when applying for a hard money mortgage loan
National hard money lenders provide a standardized loan application procedure, and they strive to make the mortgage application process simple by offering borrowers with an online application platform that eliminates all the unnecessary documentation. As a borrower, you are required to use a secure online portal to upload the correct details and forms, and this helps in expediting and streamlining the hard money financing procedure.
Here is what you need to know about the general application timeline for a hard money mortgage loan.
The majority of hard money lenders will divide the application procedure into two segments:
- Pre-qualification which is a fast approval procedure that offers a borrower a sense of the mortgage alternatives.
- Funding which is a long process that assembles more detailed information to finalize the expenses, rates, and terms involved in hard money lending.
As a borrower, the pre-qualification phase will help you understand how the loan works. Once you understand your potential loan size, fees, terms, and costs, you will use the information fix a maximum budget for the property and continue with buying process of the investment property. The lender will use this phase to assist you in compiling their loan alternatives, compare various offers and access your funding choices. Make sure you present the following documents during the pre-qualification stage:
- Personal bank statements of at least three months
- Personal credit score history of more than 550. Bear in mind that hard money lenders will always request for a hard-pull or soft-pull on your credit.
- Solutions to some basic queries. Bear in mind that the lenders will ask some questions about you and your investment property.
Basing their decision on this details, hard money lenders will offer the borrower with a list of the available hard money mortgages, giving the investor a chance to say yes or no when evaluating the investment property.
The hard money mortgage loan application will be approved in the funding stage. The lender will ask for more specific details during this stage to help them make the final decision. Once they approve the application, the lender issues the funds, letting the investor close the deal. In this stage, the lender will want to look at documents such as purchase contract, list of all the previous projects, contract bids, appraisal, upfront costs and scope of rehab works.
Hard money mortgage is one of the significant forms of financing for short-term fix-and-flippers and also for buy-and-hold investors who want to renovate several investment properties. The funding alternative presents a short approval procedure, interest-only payments and can be used to finance the purchase and renovation of investment properties. Additionally, the mortgage can be used to buy a single-family house and also a multi-unit apartment. This is because the hard money mortgage loans provide a fast approval rate and fast time to financing. For this reason, choosing the hard money mortgages over the conventional mortgage from traditional banks is the best option.