Finance is a delicate subject, so investors must understand their options when applying for a loan. For real estate investors, hard money loans, a secured lending system covered by the property in question, is a standard financing solution. However, did you know there are different types of hard money loans?
In this guide for Investors, we'll cover the 4 different types of hard money loans. Stick around until the end to find out which works best for you and how to choose the right type. Let's get started:
4 Different Types of Hard Money Loans
1. Rental Property Loans
Rental properties are one of the most common forms of real estate investment and one of the most sought-after reasons investors seek hard money loans. In addition, it is a more common alternative for investors that don't qualify for typical bank mortgages, as the criteria are less restrictive. Thus, it is an excellent option for people with low credit scores.
2. Commercial Property Loans
Unlike rental property loans, commercial loans are more specific to property used exclusively for business purposes. Moreover, since commercial properties tend to be more expensive than residential ones, investors can bank on acquiring larger sums as capital. After all, they have a higher loan-to-value (LTV) ratio, which means you can borrow more than the property's value compared to a similar residential property.
Besides securing the funds to invest in a commercial property, these hard loans often front the cost of other expenses like renovation, cleaning, and service fees. As a result, you can ensure your office or retail outlet is suitable and attractive to potential tenants.
3. Fix and Flip Loans
Another typical hard money loan is the fix-and-flip loan. These are designed for investors who fancy working on fixer-uppers for a quick profit. The most popular way to calculate the loan amount in this scenario is for lenders to consider and approve your after-repair value (i.e., the ARV). Thus, it would be in your best interest to have a clear idea of the cost and know-how to execute your project. Again, an experienced private money lender can guide you on essential terms to consider before signing.
4. New Construction Loans
If you're an investor looking for funding for a new project, a new construction hard money loan might be right up your alley. These short-term mortgages are a saving grace for many investors who need help getting approval through traditional financing methods.
Conventional lenders like banks tend to be more cautious with new construction projects as they're often more high-risk. But that's where private lenders easily step in to fill the gap and give investors speedy approval to capitalize on new deals.
How to Choose the Right Type of Loan
● Understand the Process
If you genuinely want to select the best loan for your portfolio, you must be willing to perform due diligence. An in-depth understanding of each hard money loan type gives you an edge on the negotiation table. It also helps you know which documents to provide, which can hasten your approval process so you can strike the real estate market while it's hot.
● Know Your Eligibility
Another way to make the right choice is by knowing your eligibility status. If you don't meet the criteria for a particular type of loan, it would be best not to waste your time. Understanding the process for each loan type can also help you become familiar with the requirements and whether you meet them. For example, it might be easier to get approval with a hard money loan than a traditional loan, but that doesn't mean the rejection rates are zero. Save yourself the hassle by confirming with your lender if you meet their criteria before continuing the conversation.
● Compare Interest Rates
Interest rates can vary wildly depending on market conditions, but even in the most stable climes, lenders offer terms at different rates. So instead of settling for the first lender you meet, shop around and compare the interest rates of the best businesses near you. Also, remember not to decide on the interest rate alone. Other loan terms like amount, payment schedule, and additional fees should come into play for a more wholesome picture.
Conclusion
In summary, a hard money loan is the primary go-to for investors that want more speed and flexibility with their financing. Additionally, there are 4 different types of hard money loans, each with unique features and benefits. For example, rental property loans are more often for residential homes and are easily the most common on the block. However, if you're planning on investing in a commercial property or a fix-and-flip, assess the similarly named hard money loans.
Whatever your choice, understanding the protocols and your eligibility status for each can give you a hand in making the proper selection. Also, remember to compare interest rates and check other loan details to secure the best deal. Finally, if you need help, consult a property management company for more advice on the best financial decisions for your real estate business.
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