Commercial Quick loan as an Alternative to Hard Money
Real estate investors often use hard money loans instead of their own money, money from private investors, or a loan from traditional lenders or local banks. Moreover, hard money loans are easier to qualify for, often have a low minimum credit score requirement, do not require you to prove property cash flow, and require far less documentation. You can often be approved in just a few days, as opposed to the lengthy process of a traditional loan.
Yet, there are other options, including Commercial Quick Loans. We provide financing with reasonable loan terms for a variety of investment needs, including options that don’t require a personal finance investigation.
What is a hard money loan?
A hard money loan is a type of short-term loan secured by real property.
Their terms usually last between six and 24 months, and they have higher fees and interest rates. Hard money loans are mainly used to finance flipping homes, buying investment properties, and commercial real estate purchases. They are sometimes also used by borrowers with substantial equity and poor credit scores.
Hard money loans often include both purchase financing to fund buying a property and construction financing to make improvements to the property.
What Hard Money Lenders Focus On
Hard money lenders are usually companies, private investors, or financing groups, not banks. Most of these lenders focus first and foremost on the value of the real estate put up as collateral for the loan.
Hard money lenders also care deeply about the real estate investor’s experience and business plan for the property. For the lender, it pays off to receive the money back in a relatively short time and at a higher interest rate.
Some, maybe even most, look at the investor’s credit score and depth of credit. Most hard money lenders tend to be more lenient on credit than traditional mortgage lenders. For example, they may have lower minimum credit score requirements.
Hard Money Loans vs. Construction Loans vs. Renovation Loans
The term construction loan generally refers to a loan for the ground-up construction of a new home or commercial building. It also includes purchase financing for the underlying real estate.
On the other hand, a renovation loan is a type of loan someone would need to remodel an existing building.
The main difference between a renovation loan and a hard money loan is that the renovation loan is only structured to finance renovation costs, not purchase a property.
Hard Money Loans vs. Bridge Loans
Short-term bridge loans are a subset of hard money loans. The key difference is that a bridge loan does not include the renovation or construction component. An example of this would be when real estate investors find a great deal on a piece of real estate and need a short-term loan to hold it briefly before selling it to another investor to fix and flip.
Hard Money Loans vs. Traditional Loans
Conventional mortgage financing, including loans from most local banks, has a stringent approval process that focuses heavily on a borrower's credit score, debt-to-income ratio, pay stubs, and cash reserves.
Even though hard money loans have more burdensome loan terms, such as higher interest rates and sometimes prepayment penalties, they are much easier to qualify for than conventional mortgage loans and typically don't require tax returns or income documentation.
If you want to purchase a rental property but have poor credit or credit issues you may need to consider hard money loans or their alternatives instead of conventional loans.
How Hard Money Loans Work
Applying for a Hard Money Loan
The application process for the purchase is similar to other types of finance. You complete an application, provide documentation, and usually order an appraisal. You must also provide a business plan for the property and a detailed.
Why are hard money rates and fees higher?
Hard money loan rates and fees are higher for a few key reasons. First, the terms are short, so the lender must charge higher fees and interest rates to cover the costs of an investment property loan while still earning a reasonable profit.
Second, because hard money loans often include construction financing, they tend to be higher risk than permanent financing on existing properties.
Finally, many hard money lenders have more flexible or lenient credit or underwriting requirements. For example, many local hard money lenders do not require full-blown appraisals if they lend in the same city as theirs.
Hard Money Loan Pros
- Unlike a traditional loan, hard money loans rely more on property value rather than personal credit history.
- ften, hard money loans close in as little as a few days.
- Since personal income is not a determining factor, hard money loans offer much faster approvals.
How Hard Money Loans Work
- Real estate investors have less time to pay back their loans.
- Interest rates tend to be higher on hard money loans. They also often have higher fees.
- You're going to need a higher down payment.
Exit Strategies for Hard Money Loans
Hard money loans are short-term loans, with two years typically being the longest term. Since the loan is due in full within two years, it is key to have an exit strategy to avoid paying a large lump sum. Below are some ways to repay your hard money loan.
Sell The Investment Property
This is the most common exit strategy for a hard money loan. A borrower will work with a hard money lender to finance a flip, flip the property, pay back their loan, and pocket the extra cash. However, flipping properties isn't nearly as simple as it may seem. To ensure a worthwhile ROI, investors have to rely on careful planning and work with a licensed contractor, as well as an experienced real estate agent.
Refinance Your Hard Money Loan Into Permanent Financing
In this strategy, rather than selling investment properties at the end of a flip, investors will keep them for long-term rentals.
Some investors are able to use the improvements put into the house to obtain a higher loan amount and actually pull cash out of the property. Others will simply obtain more favorable loan options, including loan rates and terms.
A few things to keep in mind for this strategy include:
Down Payment and Closing Costs – There are expenses in obtaining a new loan, and you will usually need to pay at least 20% upfront.
Prepayment Penalties – Some lenders have a prepayment penalty if you pay back the loan early. If your goal is to sell the property in the near future, pay close attention to the loan terms.
Hard Money Loan Requirements vs. Visio Lending Requirements
Here’s a closer look at some other distinctions between Visio Lending and hard money loans:
Credit Score
Commercial Quick Loans requires a minimum of 680, while not all hard money lenders require a credit report.
Appraisals
Commercial Quick Loans requires a third-party appraisal, but now all hard money lenders do. Some use a Broker Price Opinion (BPO) or other methods to determine lending value.
Property Condition
Commercial Quick Loans requires properties to be in C4 condition or greater, meaning we only fund rent-ready properties with no deferred maintenance. Hard money lenders finance construction and rehab projects, so they do not require move-in-ready property conditions.