What's The Best Way To Finance A House Flip? - Smartasset

Published Oct 29, 21
4 min read

The Hard Money Guide For Real Estate Investors

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Here’s what you should know about hard money before signing on the dotted line. What Is a Hard Money Loan? A hard money loan, sometimes called a rehab loan, is a type of loan backed by a “hard” asset, where the collateral is evaluated instead of the borrower’s financial profile.

Hard money lenders are largely uninterested in your income and credit history (many don’t ask for that information at all) and underwrite loans based on the house instead, which is then used as collateral. Are Hard Money Loans a Good Idea? Hard money loans can be valuable to both first-time and established investors who ordinarily would not qualify for a traditional loan.

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It’s a common situation with house flippers, but you don’t want to be caught unaware if your hard money lender doesn’t offer extensions. Hard money is more expensive than a conventional loan. Interest rates are higher, and you’ll also have to make a down payment and pay potential origination and appraisal fees.

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They’re Short-Term Loans, Hard money loans are typically taken out for a term between six to 18 months (or longer), says Tayne. House flippers only need the loan for the length of the renovation. Depending on the lender, you may be able to extend the life of the loan if the project takes longer than expected, but you’ll have to check how easy that extension is to acquire before signing any contracts.

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High Interest Rates, Hard money loans are typically considered riskier. While traditional lenders are able to offer more competitive rates because the underwriting process is more rigorous. Interest rates on hard money loans can run between 8% and 12% (or higher), depending on the terms of the loan. 2. They Come with Hidden Costs, You’ll have to put up quite a bit of your own money to get hard money for your project.

You Can Lose the Home, The reason most hard money lenders aren’t concerned with your credit is because they have the home as collateral. If you stop making payments, the hard money lender can repossess the house and sell it to recoup its losses. So make sure to always make payments on time, and aim to finish all home improvement projects within the given timeframe.

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You just have to be responsible with it — that’s all.”When Does a Hard Money Loan Make Sense? A hard money loan won’t work for every situation. To put yourself into the best position moving forward, you need to have a solid plan for rehabbing the home, enough money to make a down payment, and an interest rate that isn’t prohibitively high.

1. You Have A Foolproof Plan If you’re new to the process of house flipping, make sure you cross all your t’s and dot all your i’s. And even if you aren’t new to investing in real estate properties, the hard money lender is going to want to know enough about you before approving you for a hard money loan.“We ask them what their experience is, how many properties they’ve flipped in the past.

We try to validate that they know what they’re doing,” Howard says. So make sure you’re being as precise as possible when coming up with the initial plan. “If you’re more experienced, you know how to use [hard money loans] properly,” Tayne says. “If you’re less experienced, you can get jammed.

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It’ll be negotiated during the underwriting process and ultimately determined by the lender, based on when remodeling projects are initiated during the plan. There are few circumstances in which you’ll receive the full loan amount upfront. Functionally, a hard money loan is more like a line of credit than a loan.

“Say we’re funding a $100,000 rehab: they would pay for the first $25,000 upfront [as a down payment], we would send a third party inspector out there who will inspect the budget from the get go and they validate [with pictures that] the work is being done on budget and then we reimburse them.”2.

You have to put down a percentage as a down payment. This is common for any loan used to flip houses, as most house flippers are required to put down at least some of their own money. Tayne says the typical down payment is 10%. Some lenders might require a down payment as large as 20%.

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You Can Justify the High Interest Rate, Interest rates for a hard money loan are higher than if you go with a traditional lender. You’ll be paying interest every month, so don’t take out a higher loan amount or higher rate than you’re able to afford. Take into account the expected post-rehab resale value of the home; you may be able to offset the high interest rate with the expected profit.

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