Entrepreneurs who ply their trade within the real estate field will often consider utilizing hard money loans to accomplish their financial goals. A hard money loan is essentially a loan that is secured to a piece of property. Often referred to as short-term bridge loans, hard money loans are commonly used by individuals to complete real estate transactions without utilizing a bank.
Individuals looking to enter the world of house flipping will likely find themselves confused by a hard money loan. Why does a hard money loan require a down payment? Does this mean that hard money loans should be avoided? As it turns out, there is quite a bit to learn about hard money loans so let’s dig into our less.
Hard Money Lenders: Down Payments Are Required – But Why?
When it comes time to take out a mortgage for your home, you will often be asked by the bank to bring in a down payment to close the deal. The lending industry looks at your downpayment as a form of accountability. You are putting your skin in the game, so to speak. If your project fails, then you lose money along with your lender. Easy enough to understand, right?
Now, what happens when a hard money lender finances your entire house flipping project?
When a lender agrees to finance 100% of a property purchase as well as the corresponding improvements, that puts you into an interesting-if-stable situation. Let’s say that you default on your hard money loan after signing a 100% financing deal with a lender. At this point, you would lose your property and the lender could do with it as they please, up to and including selling the financed property.
With this appropriately understood, we must ask ourselves – Should we use a hard money loan to flip a home?
Using a Loan to Flip a House – Cost/Risk Analysis
At this point in time, you might be wondering why you should get a hard money loan when a traditional loan sounds more common. The truth is that hard money lenders provide a dose of freedom to the house flipping industry that traditional lenders cannot match. In addition to this financial flexibility, working with a hard money lender can lead to a few of the following benefits during your house flipping ventures.
- Work Around Credit Problems – Credit problems and house flipping don’t have to negate one another. Most people don’t have absolutely stellar credit, but that shouldn’t stop you from making money in real estate. Hard money lenders work with individuals rather than their credit scores.
- Target Better House Flipping Projects – Traditional lenders have quality standards when it comes to ensuring a loan against a home. For house flippers, the goal is to get a home in bad shape in order to repair it to sell for more money. Hard money lenders are willing to work with you on your fixer-upper.
- Get The Job Done NOW – House flipping and timely sales go hand-in-hand. Hard money lenders are amazing when you need financing, fast. From approval to funding with a hard money lender can take only 14 days. Individuals in booming markets like Dallas and Chicago benefit directly from such quick turnarounds.
Whether you are ready for a hard money loan or not, building a foundation of knowledge is integral to long-term success in the house-flipping world. With house-flipping rates at almost a decade-long high in 2019, the industry is wide open for savvy investors.