If you’ve seen the TV show Fixer Upper or Flip This House, you know what a cash cow buying a home in disrepair and fixing it up can be. When you find a home on the market that needs work and fix it up, you’re often able to sell it for thousands of dollars more than you bought if for, turning an awesome profit.
However, one hurdle in the home-flipping process is securing the funding necessary to acquire the home and do the work to fix it up. Banks are often hesitant about funding loans for more money that the home is worth in its current state. Some traditional mortgage lenders offer renovation financing, but require a superb credit score for the additional risk they’re taking on. To make matters more complicated, when people who work with investment property projects have multiple projects going at the same time, it increases their debt to asset ratio and makes it a lot more difficult to find. For this reason, hard money rehab loans have become a good solution.
What are hard money loans?
A hard money loan is a loan that uses the value of the property that is being purchased as collateral, rather than the credit score of the borrower. Home flippers find this advantageous because sometimes it is necessary to take on more debt than they could carry on their own(prior to flipping their homes), which makes it next to impossible to jump through the lending hoops that traditional lenders require.
Also, since the process required for securing funding from hard money mortgage lenders is more straight forward than that of a bank, it is often easier to get money fast through the hard money loan process. When a fixer upper hits the market at the right price, it is often a mad dash to grab it before someone else does. Being able to get money as soon as they need it is one reason that hard loans are becoming common in the investment property arena.
So what are hard money rehab loans?
Hard money rehab loans differ from regular hard money loans because they are based on the potential value of the property, rather than its current value. In other words, if you can buy an ugly home for $100 thousand, that is typically the amount that a traditional bank will give you to buy it, if your credit and income suggest that you are good for it. With hard money rehab loans, investment property mortgage lenders look at your home that is valued at $100 thousand and consider what the properties (that are in good shape) in the area are going for. That’s a good indication of what your investment property would go for if it were in good shape. The potential value of the fixer upper is used as collateral to secure the loan.
What are the terms of hard money rehab loans?
Investment mortgage lenders generally require their investment to be repaid in a shorter time frame than traditional lenders. While a traditional mortgage allows borrowers up to 30 years for repayment, a hard money loans are to be repaid in five years or less. The goal of most rehab loan borrowers is to fix the property up and sell it, so repaying these types loans quickly isn’t usually a deal breaker.
Can any type of home by purchased with a hard money loan?
Hard money loans do not have as many regulations that traditional lenders have, but one requirement is that the property should not be purchased as a dedicated home for the borrower. This even applies to vacation homes that are only used by the borrower a few times a year. If you are considering investing in a vacation property for the added income when you aren’t staying at it, you should look into these specifics before using a hard money loan to fund it.
Do hard money loans have the same fees that traditional loans have?
Due to the added risk that hard money lenders take on, their loans typically have higher interest rates and sometimes additional fees that traditional lenders do not require.
Do you have any other questions about the hard money rehab loan process? Please share below!