To say it simply, a hard money lender is someone who funds a short-term loan in exchange for real estate as collateral. Hard money lenders in Minnesota typically lend to individuals or businesses. Hard money lenders are private investors, or a group of investors, and are not associated with a bank or credit union. Hard money loans are typically short-term, ranging from 12 months up to 5 years in duration. Loans are paid back after the property acquired is flipped or when permanent, lower interest financing is obtained such as a conventional mortgage. Interest is normally higher than a conventional bank loan due the increased risk taken on by the lender.
A common misconception about hard money lenders in Minnesota, and across the US, is that they are loan sharks. This is simply not true. While hard money lenders do tend to charge higher interest rates than traditional banks, it’s because they are assuming more of a risk. Hard money lenders also never grant a loan unless they are confident that it will be repaid. Loan sharks offer unfavorable terms and set difficult loan terms that make it hard for the lender to pay back the loan. Hard money lenders also don’t practice predatory lending or “loan-to-own” practices, intending to foreclose on properties when they make the loan. They are regulated and must operate within the laws and regulations that make loans safe for both borrowers and lenders. Don’t let a few bad apples misconstrue your perception of how useful and valuable a hard money loan can actually be.
Why Get a Hard Money Loan?
There are several reasons you might opt for a hard money loan over a traditional bank loan. Hard money lenders are primarily concerned with the property value of the collateral over the borrower’s credit score. Say for example, that you cannot obtain conventional financing due to a recent short sale or foreclosure on a property. While your credit score will have been affected, you could still be eligible for a loan through a private hard money lender. You just need to have sufficient equity in the property being put up as collateral.
Time is of the Essence
Don’t assume that hard money loans are only for people who are desperate! One of the top reasons to use a hard money lender in Minnesota is that you can get the money quickly. Bank loans can take a long time, up to 30-45 days, to fund. Meanwhile, a hard money loan is typically approved within 15 days and sometimes can be funded in as little as a week. Sometimes hard money loans can even be funded the same day! That would never happen if you were trying to obtain traditional funding through your bank or credit union. A hard money loan can be a real advantage to someone like a real estate investor who is competing with multiple bidders for the same property. The ability to make a quick close with a cash offer thanks to the hard money loan can really set the buyer apart from the competition.
Another reason you may choose to go with a hard money lender in Minnesota is because you’ve been rejected for a conventional loan by your bank or credit union. Perhaps you’ve just come out of a foreclosure or short sale, or maybe you have some credit issues or lack of income history. Many hard money lenders in Minnesota are able to take a risk that your bank otherwise wouldn’t as long as you have enough equity invested in the collateral you are providing. In the event that you were to default on the loan, the investor would take the collateral you provided and sell it to recoup their investment.
What You Can Do with A Hard Money Loan?
Hard money loans are ideal for investment real estate situations such as:
Fixer Uppers and Flips
Fixer upper and flip property investors often use hard money loans to finance the purchase of the home and finance the renovations all under one short-term loan. These types of properties are held on to just long enough to increase the value, usually not longer than one year—which is the preferred amount of time to have out a hard money loan. Then, after the property is flipped, it is sold and the hard money loan can be repaid with the profits from the sale.
Buy-and-hold investors usually go for a hard money loan when an investment property isn’t in good enough condition to qualify for conventional financing through a bank. A hard money loan is often used in this situation, at least until the property is rehabbed enough to get good enough marks for a traditional mortgage.
Hard money loans come in really handy when a real estate invMakestor is on a condensed timeline to buy a property. Think short sales, foreclosures, or auction properties. Many kinds of real estate investors come across properties that require fast funding, including but not limited to fix-and-flip investors and buy-and-hold investors.
Whether you’re looking to get into a personal real estate project such as a house flipping venture or want to purchase a new business property, choosing a hard money lender in Minnesota can give you the money you need when you need it. Don’t let that special property slip away because you chose a conventional funding source!
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