Whether you are a new or established investor, financing your purchase through a loan can help you secure the funding you need for the transaction. Although there are several types of loans you can apply for, a hard money loan can be advantageous if you want to secure and access your loan quickly. When you apply for a hard money loan, you can use the property you purchase to secure financing.
Because private lenders can offer flexibility, you can find hard money loans that fit your unique situation. A hard money lender in Houston, Texas, can help you through the process of securing your loan. Review the guide below for additional insight into applying for hard money loans.
What Is a Hard Money Loan?
A hard money loan secures funds with the tangible property rather than a borrower’s credit. Hard money loans are primarily used in real estate transactions when purchasing property to resell, usually in a fix-and-flip project. You can secure a hard money loan through private lenders or companies, as banks don’t offer this type of financing.
Similar to bridge loans, hard money loans are usually short-term options if you want to fund a real estate purchase or renovation quickly. For instance, a homeowner who wants to purchase more real estate might apply for a hard money loan if their current home hasn’t sold yet. In this case, the homeowner can use the hard money loan to make their new purchase quickly and pay down the loan with cash once they sell the other property.
How Do Hard Money Loans Work?
Unlike conventional and commercial loans, the Federal Reserve doesn’t regulate hard money loans, which can mean practices and loan eligibility differ between lenders. Typically, private lenders may establish terms, rates, and fees that align with their abilities to take on various real estate investments. They may also evaluate lending risks and collateral value differently, so if you’re going to apply for a hard money loan in Houston, researching your options is important. In most cases, though, hard money loans work according to several common parameters:
Hard money loans are short-term loans that most lenders might expect you to pay back within 6 months. However, the terms for these loan types can range between several months to several years, and many hard money loans can require a balloon payment, which is payable in full at the end of your term. If you default on the loan repayment at the end of their term, the lender might be able to take ownership of the collateral property until the homeowner can fulfill the repayment.
Hard money loans often come with higher interest rates than conventional or commercial loans. Generally, the rates for hard money loans can range between 7% and 15%, since the risk for lenders can often be higher with real estate investments.
At the same time, most private lenders who offer hard money loans don’t require the extensive financial assessment that traditional banks and lending companies do. For instance, most lenders don’t require financial records like your current debts, credit score, or long-term financial history. Without this extensive financial evaluation, hard money loans are more accessible options for real estate purchases and fix-and-flip ventures.
Similar to traditional mortgage loans, your hard money loan may require a down payment. The amount you actually invest as your down payment can vary between lenders, but most loans often require a payment equal to 10% of the property value. Some lenders may determine a percentage for down payments at a different rate, depending on their interpretation of a property’s loan-to-value ratio.
If you’re remodeling a home with the intent to sell for profits, your lender might determine the down payment using the after-repair value, which applies to the estimated value of the property after making repairs. Applying the after-repair value to establish a down payment carries a higher risk, though. This means lenders may set higher interest rates and points when using the after-repair value to set a percentage for the down payment.
Fees and Points
Points comprise a type of fee that lenders may charge to cover the administrative fees, costs, and the initiation of the loan. In many cases, you pay the points when initiating and closing on your loan. Hard money loan points are also useful for lenders since borrowers who have fewer points are typically at lower risk.
Lenders calculate these loan points based on percentages of total loan amounts. Four points on a loan, for example, is equal to 4% of the total loan value. Commonly, points range from 2% to 10%, and can depend on your lender and ability to repay the loan quickly.
How Can I Apply For a Hard Money Loan?
If you’ve found a potential real estate investment that aligns with your goals, you can apply for a hard money loan following a straight-forward process:
To pre-qualify on a hard money loan, you can speak to private lenders in your area to run an initial report on the intended property value. This initial report ensures the after-repair value aligns with the purchase price, which can help the lender better assess the investment risks. During the pre-qualification process, lenders require several important documents in addition to your loan application:
- Government-issued photo identification or state driver’s license.
- Financial statements from the most recent 60 days.
- Renovation plans.
- Purchase contract.
After pre-qualifying for your hard money loan, your application packet goes into pre-authorization of payment. Your pre-authorized payment must have an appraisal or a BPO evaluation on the property to confirm the accuracy of valuation. The lender may also want copies of your repair or contractors’ estimates to perform appraisal efficiently. After appraising your pre-authorization payment, the hard money lender determines your loan approval. Upon approval, you’ll need to sign an agreement to the lender’s terms and conditions.
Advantages of Hard Money Loans
Applying for a hard money loan can be highly beneficial for securing funds for your real estate purchase. Unlike traditional mortgage loans, hard money loans can provide a flexible and fast option no matter your credit history. Consider several more ways to benefit when you apply for a hard money loan:
One benefit of hard money loans for real estate purchases is the speed at which you can receive approval and funding. After a private lender evaluates the property value, your down payment or equity, and your ability to make monthly payments, they can approve your loan in as little as a single day.
Funding for hard money loans occurs quickly, too, with funds showing up within several days after you apply for a hard money loan and gain approval. With the process of applying for and receiving your loan only taking several days, you can get the money you need to fund your real estate project.
Hard money loans can often be easier to qualify for than traditional types of loans. Many times, hard money lenders have fewer requirements for borrowers to qualify than banks and government agencies do. Typically, private lenders may only assess your ability to repay the loan, your equity in the property, and the investment risk. Hard money loans can also be more accessible for self-employed borrowers, as many banks require documented employment history for financing. The few requirements of hard money loans make this financing option accessible to borrowers in many different types of financial situations.
Another benefit of a hard money loan is the flexibility that you and your lender have to negotiate terms and repayment. A hard money lender is able to work with you to establish a down payment, interest rate, exit plan, and collateral that fit your unique position. In some cases, lenders may even accept alternative assets as collateral instead of the property you’re purchasing or remodeling, including retirement assets or your current residential property.
Where Can I Find a Houston Hard Money Lender?
Overall, hard money loans can be an effective financing option to buy and sell real estate quickly. Higher rates can come with a higher risk, though, so it’s essential to speak with your lender to determine the best course of action for your project. If you’re considering another method of funding your fix-and-flip property in Houston, Texas, acquiring a loan from Quick Lending can help you fund your investment quickly and easily.
If you’re investing in real estate in the Houston area, the team at Quick Lending can provide the assistance you need when you apply for a hard money loan. Whether you’re purchasing a property to flip and sell or managing a rental, Quick Lending has the experience you need to help you secure the financing you need for your project.