Construction Hard Money Loans
For real estate investors who are interested in financing construction projects, construction hard money loans can be a viable financing option. These loans are often used by experienced real estate investors who need to secure financing but either do not want to use or who do not qualify for a traditional loan.
To understand how construction hard money loans work, it’s important to understand what standard hard money loans are.
What is a Hard Money Loan?
A hard money loan, also commonly referred to as a bridge loan, is short-term financing that is specifically designed for real estate investors. These loans providing funding that can be used to purchase an investment project.
Unlike traditional loans, which require borrowers to prove that they can repay the money that they are lent, and their ability to repay the loan is based on their credit, hard money loans are based on collateral in the form of real, tangible property. If the borrower defaults on the loan, the lender can repossess the property that was used as collateral and then sell that property to recoup the money that was lent to the borrower.
When determining a borrower’s eligibility for a hard money loan, lenders consider loan-to-value ratio; the amount of the loan compared to the value of the property. The lower the loan-to-value ratio, the more likely a borrower will qualify for financing, as lenders will assume less risk financing the project; however, the higher the loan-to-value ratio, the less likely it is that a borrower will qualify for financing, as the lender will assume more risk financing the project.
Hard money loan terms are shorter than traditional loans; usually, five years is the maximum term. Additionally, the interest rates are higher than traditional loans, as the lender assumes more risk. However, because real estate investors use the money that they secure from the sale or rental of their investment property, they will have faster access to money that they can use to repay the loan, so shorter terms and higher interest rates aren’t a huge concern.
What is a Construction Hard Money Loan?
A construction hard money loan is similar to a standard hard money loan. Instead of using credit to determine a borrower’s eligibility, collateral is used to secure financing. In the case of newly constructed projects, however, loan-to-value ratio is estimated, as the property has yet to be constructed and the actual value cannot be determined. As with a standard hard money loan, the lower the loan-to-value ratio, the more likely it is that the borrower will qualify for financing. Also like a standard hard money loan, if the borrower defaults on a construction hard money loan, the lender can use the newly constructed property that was used as collateral and sell it to recoup the money that was lent.
Benefits of Construction Hard Money Loan
For real estate investors who are interested in building newly constructed investment properties, construction hard money loans offer the following benefits:
- Fast access to financing, as the process is much quicker than the process of a traditional loan; financing can be secured in as little as two weeks, compared to a traditional loan, which can take 45 days or longer to complete.
- Flexibility, as hard money lenders are usually more willing to customize the terms and conditions of these loans to meet the needs of the borrower.
- Easier approval, as the credit of the borrower isn’t the determining factor for financing, but rather the value of the property that is being used as collateral.
Despite the shorter terms and the higher interest rates, construction hard money loans can benefit real estate investors who are interested in investing in new construction properties.
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