When getting involved with real estate investing or handling renovation expenses, most people don’t have substantial cash on hand, so a loan is necessary. However, what do you do if you don’t have traditional circumstances, need to act quickly, or your credit is less than stellar? Consider using a hard money rehab loan.
What Is a Hard Money Rehab Loan, and Who Offers Them?
Borrowers typically use hard money loans as short-term funding for real estate transactions. Your lender will focus more on the property’s value and not focus as much on your creditworthiness when underwriting the loan.
The primary reason to obtain a hard money rehab loan is to renovate a property for resale. For that reason, you’ll often hear people refer to these as fix-and-flip loans.
Often, private lenders in Florida, such as Associates Home Loan, specialize in these products. Unlike banks and credit unions, which stick to conventional financing, private lenders can have more flexible lending standards to meet your needs.
What Are the Advantages of Using Hard Money Rehab Loans?
A hard money loan can be preferable to pursuing a conventional loan for many reasons.
Quicker Access to Funds
Experienced home flippers intend to turn a quick profit from a home rehab and don’t have time to wait on the grueling traditional mortgage underwriting process. Hard money rehab loans usually close faster. Instead of waiting weeks or months, you can often get your funds in less than two weeks — even a few days in some cases.
Flexibility for Those With Bad Credit or Who Can’t Prove Income
Banks and credit unions focus more on your status as a borrower and will turn you down if your credit is too low without providing other options. You might also have nontraditional sources of income that don’t meet their eligibility requirements. In contrast, private lenders can work with borrowers who have unique circumstances.
No Private Mortgage Insurance
Because the property is the collateral and you only need the funds for a short time, private lenders can waive the PMI requirement. This reduces your expenses so you can focus on fixing and flipping the property.
Flexible Down Payment and Terms Options
Traditional lenders have strict rules about where your down payment comes from and won’t let you borrow the money from another source. These restrictions rarely exist with fix-and-flip loans.
Better for Small Businesses Who Need Rehab or Fix-and-Flip Loans
Small business owners who participate in home flipping usually have income with more ups and downs than W-2 employees. Instead of relying on paystubs or high credit scores, your private lender can examine your plans, the market, and the property to help you find the right loan.
Also, hard money loans can be a good solution when you need additional capital to finish a project that exceeds your original budget. Or you might be using funds to rehab a rental property to build wealth. In either case, hard money rehab loans can be the answer.
Flexibility for Property Type
Again, conventional lenders look for conventional circumstances that may not match your situation. If you have a unique business proposition that banks won’t consider, talk to a private lender about hard money loans.
What Is the Lending Process for Hard Money Rehab Loans?
The requirements for a hard money rehab loan vary and depend on your circumstances. Of course, the better your credit and the higher your down payment, the better your terms and rates will be.
The key thing is to work with a reputable lender who will walk you through the process. Basically, that includes:
- You submit a loan application with your identification and details about the property and your rehab plan.
- The lender assesses the property and its after-repair value.
- The lender checks your experience, income, and credit score to find you the best rates.
- The lender structures the loan and offers you terms.
- You close the deal by finalizing the paperwork.
You can finish the whole process in a week or two, much faster than working with a bank.
How Do You Get the Most Benefit out of Using a Hard Money Loan?
Hard money rehab loans naturally have somewhat higher interest rates, but this doesn’t have to be an impediment. Your success largely depends on having a solid business plan that leads to a healthy profit. Create a reasonable budget and communicate openly with your loan officer about your plans.
It also might make sense to collaborate with someone who has more experience. Not only do you get more help and valuable insights, but you might also get better loan terms with a cosigner.
When Might a Hard Money Rehab Loan Not Be a Good Idea?
A hard money rehab loan is not a good idea if you can’t afford to make your payments. You’ll face stiff penalties any time you default. Calculate whether the term is long enough and if your loan-to-value is low enough.
If your LTV is too high, a reputable lender likely won’t approve you anyway. It’s not worth the risk of borrowing from a less reliable source just to get funding you won’t be able to pay back. Instead, review your options and rework your plan to avoid problems.
What Are Other Good Loan Options if a Hard Money Rehab Loan Isn’t Right for You?
A hard money rehab loan might not be suitable in your case. You might try:
- Commercial lending
- Home equity loans
- Reverse mortgage
- Bridge loans
- B/C loans
Fortunately, the pros at Associates Home Loan offer these options and will help you pick the right financing.
How Do You Find a Good Lender?
Your lender should have a team of agents who want to help you succeed. It’s usually an advantage to work with a local group that understands your state’s real estate lending requirements. Also, check out reviews to see the experience of other borrowers and ensure the company has the appropriate licensing and accreditations for home loans.
Find the Right Hard Money Rehab Loan With Associates Home Loan
Are you ready to take the next step on your renovation or fix-and-flip project and just need solid financing from a reliable lender? Talk to our friendly team at Associates Home Loan to learn more about securing a hard money rehab loan.