Real estate investors who know when to use 90% hard money loans maximize the potential return and minimize their cash out of pocket on every project. By using a hard money loan, the borrower finances the vast majority of a real estate purchase they intend to resell soon.
How is a hard money loan different than a traditional mortgage?
A hard money loan is different from a traditional mortgage in many ways. Primarily, a hard money loan is backed by the asset being purchased, rather than the traditional conventional underwriting approach of the borrower. This is great for house flippers who have unique income situations or are borrowing assets.
Hard money loans have much shorter terms than traditional mortgages. While the typical mortgage on a home is 30 years, hard money loans often have terms of 6-18 months.
The rates of hard money loans are higher than traditional mortgages. This is because the loan is intended for short-term real estate investors who do not want to qualify traditionally rather than owner-occupied long-term primary residences.
Why use a hard money loan for house flipping?
House flippers are always racing the clock. Hard money loans are often secured in 1-2 weeks, whereas traditional mortgages take 30-45+ days. This is because hard money loans don’t have to go through many of the rigorous, time-consuming checks that traditional mortgages go through. This means that cash can get to the borrower more quickly. For borrowers financing a real estate purchase without much cash on hand, a hard money loan gives them the cash they need to compete for a property and complete the purchase.
In addition to getting cash quickly, hard money lenders also offer reimbursement for renovations made to a property. This allows a borrower to put in the work of fixing up a property and get paid back for it before they sell the property. For the real estate investor, this means minimizing how much cash is tied up in the property, allowing them to put that money towards their next project.
When to use a 90% hard money loan?
House flippers have the option to use traditional investor financing, but that requires a 20% down payment. Using a 90% hard money loan means that the borrower only needs to allocate half as much of their own cash towards the project. This is great for those who have multiple house flipping projects going on at once or are simply low on cash but don’t want to miss an opportunity.
For house flippers and real estate investors who are working on an expedited timeline and don’t want to tie up much of their cash in a property, a 90% hard money loan is an excellent choice.
How to get a 90% hard money loan
Even though a hard money loan is backed by a real estate asset as collateral, the lender will still analyze the borrower to ensure the loan will get repaid. However, since hard money loans don’t rely on the borrower’s ability to repay the loan, lenders will assess the borrower’s plan for flipping the property. This includes the proposed renovations, costs, timeline, after-repair value, location, and state of the real estate market where the property is located.
To ensure success, borrowers should have a solid, detailed plan and relationships with contractors ready to start work when the project begins. This is especially important for first-time flippers who typically need to bring a little more for a down payment.