Things You Need to Know About Palm Beach Hard Money Loans
If you are unable to or do not want to go through a traditional lender, a hard money loan can be your best option. Hard money loans are intended for home flippers and real estate investors. These short-term loans are normally subsidized based on the home being used as a collateral instead of your credit. This type of loan can be expensive and risky, and if you’re new to flipping homes you’ll need the help of experts to help you understand hard money loans before you sign the dotted line. This is where Palm Beach Hard Money Loans comes in.
What is a Hard Money Loan?
Hard money loans, or sometimes called rehab loans, are loans supported by a ‘hard’ asset, where rather than the borrower’s financial profile, the collateral is evaluated instead. House flippers often choose this type of loan to obtain short-term financing for home renovations.
Short-term, conventional loans such as fix-and-flip loans and rehab loans exist. These usually involve highly meticulous underwriting processes that can take weeks or up to months for approval. Hard money loans, on the other hand, can be approved quickly—within a day or a week at most—if you qualify. Hard money lenders do not really care about your income or credit history (in fact, most do not even require that information) and underwrite loans based on the house, which is used as collateral.
Hard Money Loans: Are they a Good Idea?
According to experts from Palm Beach Hard Money Loans, this type of loan can be beneficial to both first-time and established investors who wouldn’t normally qualify for traditional loans. With hard money, loans are individually approved based on the property and the borrower’s experience. Standard rehab loans usually require good credit score, proof of income, evaluation of existing assets and debts, and a low debt-to-income ratio. The application process is usually longer too. But you need to be aware of the dangers. While hard money loans are a good funding source, you could get taken advantage of.
Hard money costs more compared to a conventional loan. Interest rates tend to be higher and you also have to make a down payment and pay appraisal and potential origination fees. It’s important to also take into consideration possible construction delays, which usually happens in the case of house flipping, and could incur additional costs.
Pros of Hard Money Loan
According to experts at Palm Beach Hard Money Loans, there are benefits to securing hard money loans and they are as follows:
- No Need for Good Credit Record –hard money loans are loans based on assets, which means that lenders look more at the value of the house itself and evaluating your rehab plan to ensure it’s realistic for the amount of money you want to loan. Most hard money loan lenders do not perform background or credit checks on their applicants. Just remember that each deal is customized and not subject to a fixed approval process.
- Quickly Close on the Loan –standard rehab loans can take weeks or even months to get approved, since banks have to take a deeper look into your financial health, which involves your employment status and history, credit score, existing assets and debt, and income. With hard money loans, you can close on the loan in just a week—some even as quickly as a day.
- They’re not long-term loans –hard money loans are normally taken out for between six to eighteen-month terms (or longer). House flippers only need to loan based on the length of renovation being done. You can extend the term of the loan if your renovation or rehab project takes longer than expected. However, you need to check how easy it is to acquire the extension before you sign any contracts.
Cons of Hard Money Loans
- Higher Interest Rates –there is usually more risks involved with hard money loans. Traditional lenders can provide more competitive rates because the approval process is a lot more meticulous. Interest rates on hard money loans can range from 8% to 12% (or more), depending on the conditions of the loan.
- Hidden Costs –you’ll have to use a bit of your own money to get hard money for your project. Besides the down payment (around 10% to 20% of the loan), you also have to pay the required fees by each lender—usually an origination fee (at least 2% of the loan amount), a document fee for processing paperwork, an an appraisal fee (usually around $500, depending on the location).
Unlike other rehab loans, hard money loans also require builder’s risk insurance (otherwise known as a course of construction). This type of policy protects construction buildings and materials, including fire damage, theft and vandalism. You should make sure the appraised cost of the property and renovation costs to be covered by the policy, and it will likely cos the policy around 1% to 4% of the targeted project budget.
- You Can Lose Your Property –one of the biggest reasons why money lenders do not care about your credit is because they have your home as the collateral. Once you stop making payments, the hard money lender can repossess your home and sell it to recover its losses. Therefore, you have to make sure to pay on time, and make it a point to finish all home improvement projects under the time frame given. Hard money loans tend to be a ‘last resort’ kind of thing. If you have a strong deal, it’s time for you to use it. It could be a good gateway in, but you just have to be responsible with it.
When is It Reasonable to Take out A Hard Money Loan?
Hard money loans won’t work for everyone and for every situation. In order to move into the best position forward, you must have a foolproof plan for rehabbing the home/property, enough money to make a down payment, plus a reasonable interest rate—one that isn’t prohibitively high.