Hard money loans in the United States account for about 20% of real estate financing, at least for all those marketplaces characterized by great competition.
When investors and developers want to tap into funding quickly, money loans are the strong stick investors, and developers use them whenever they want to tap into funding quickly when traditional lenders cannot fulfil such financing requirements.
But of course, there are several forms of hard money loans, and being familiar with them and their uses will be highly productive once put to good use.
Types Of Hard Money Loans
Various real estate needs demand unique types of hard money loans. Below, we understand some of the most common types, their uses, advantages, and potential downsides.
#1 Fix-and-Flip Loans
Fix-and-flip loans are made for investors who buy distressed properties, rehabilitate them, and then sell the property at a profit. These loans are usually short-term, repaying for 6 to 18 months.
How does It work:
- The loan amount depends on the ARV of the property, not its current condition.
- Funds are used to purchase the property and cover renovation costs.
- Repayment occurs once the property is sold, usually in a lump sum.
Ideal for:
- Investors searching for properties below value, which also require rehabilitation
- Projects that have an outlined timeline for rehabilitation and resale
- Markets with high demand for renovated homes
Advantages:
- Fast approval and funding, which usually occurs within a week.
- Interest-only payments during the term of the loan, thereby reducing the monthly obligation.
- It does not rely on a significant credit history. The property is used as collateral.
Potential Risks:
- High interest rate between 8-15%.
- Short terms mean a fast project finish.
- The danger of overestimating ARV, meaning there is a likelihood of financial shortfalls.
#2 Bridge Loans
A bridge loan is a short-term financing for real estate transactions. It ” bridges” the gap between purchasing a new piece of property and getting permanent financing or selling an existing property. They typically vary from 6 months to 3 years.
How it Works:
- The loan is secured against the current property owned by the borrower or the one being purchased.
- The funds acquired are used to pay off the down payment or the purchase price up to the sale of the existing property.
- It is repaid once the existing property is sold or through refinancing.
Best Use Cases:
- Homebuyers who transition between properties
- Investors purchasing a new property before liquidating an existing asset
- There is a need for quick closing to secure the property
Advantages:
- Immediate access to capital, usually within days.
- Flexible repayment terms, with the option to extend if necessary.
- Allows buyers to act quickly in competitive markets.
Potential Risks:
- Higher interest rates than traditional mortgages.
- Risk of carrying two properties if the existing one does not sell quickly.
- Potential for financial strain if the sale is delayed.
#3 Construction Loans
Hard money construction loans are meant for new construction and major renovation jobs. It finances building materials, labor costs, and every other expense needed in construction.
Unlike regular construction loans, a hard money construction loan requires few conditions, making it convenient for developers who want cash fast.
How it Works:
- Money will be paid as draws once significant construction has been completed.
- The loan is typically repaid by either a long-term mortgage at project completion or outright.
- Interest is paid only on the sum drawn, not the entire loan.
Best Use Cases:
- Ground-up construction projects, including single-family houses or multi-unit developments
- Major renovations or additions to existing structures
- Developers with a project timeline and budget.
Advantages:
- Both the cost of purchasing land and building will be covered.
- Disbursals are flexible and tied up with the stages of the project.
- Interest-only payments during the construction period.
Possible Risks:
- Highly dependent on project plans and timelines.
- More expensive interest rates and fees than other types of loans.
- Chances of cost overruns or delays that affect repayment.
#4 Land Loans
Land loans are taken to buy unconstructed land with a future development plan. Since land has no structure, these loans are considered riskier and often have higher interest rates and more significant down payment requirements.
How It Works:
- The land itself secures the loan.
- Funds are used to acquire the property, with repayment terms typically ranging from 1 to 5 years.
- Interest rates are often higher due to the lack of immediate income potential.
Best Use Cases:
- Investors are planning to hold land for appreciation.
- Developers acquire land for future projects.
- Individuals purchase land for personal use, such as building a custom home.
Advantages:
- Enables the purchase of land without immediate development plans.
- Flexible repayment terms and can be rolled over if needed.
- It can be used for residential, commercial, or agricultural land.
Potential Risks:
- Interest rates are generally higher because there is no immediate income potential.
- Fewer lenders than in other loan types.
- Zoning or environmental issues can cause land value to drop.
#5 Owner-Occupied Hard Money Loans
Unlike investment-oriented hard money loans, owner-occupied hard money loans are borrowed by the customer who will occupy the financed property. The loan carries more stringent rules and consumer protection acts.
How it works:
- The loan is collateralized by the property purchased
- It funds the purchase or refinance of a residence
- The loan repayment terms are much shorter than those for a mortgage; 1 to 3 years are typical
Best use cases:
- Poor credit borrowers who cannot qualify for traditional mortgages.
- Homebuyers who require quick financing in competitive markets.
- Individuals who want to refinance a property with substantial equity.
Benefits:
- Faster approval than traditional mortgages, usually within days.
- Less stringent credit requirements, focusing on the value of the property.
- It can be a stepping stone to refinancing with a traditional lender.
Potential Risks:
- More fees and interest rates in contrast to traditional loans.
- Shorter repayment terms may increase financial pressure.
- Limited availability since not all hard money lenders provide owner-occupied loans.
#6 Transactional Funding
Transactional funding is a very short-term loan (usually 24–48 hours) applied in wholesaling real estate. It enables the investor to purchase and sell the property on the same day without using their money.
How It Works:
- The loan covers the purchase price so the wholesaler can purchase the property.
- The loan is repaid immediately upon resale to the end buyer, often on the same day.
- No upfront capital is required from the wholesaler.
Best Use Cases:
- Real estate wholesalers who need short-term financing to close deals.
- Transactions requiring same-day funding.
- Investors looking to minimize their financial exposure in deals.
Advantages:
- Enables quick closings without upfront capital.
- Minimal risk for the lender due to the short loan duration.
- Ideal for high-volume wholesalers.
Potential Risks:
- Needs a pre-verified end-buyer to prevent default.
- There are pricey service charges for using it for the short term.
- Only suitable to engage in wholesaling deals. Not fit for all types of investments.
Find Your Ideal Hard Money Loan!
Hard money loans provide available and concentrated capital for real estate investors and property developers. Each type is used for specific purposes, ranging from fix-and-flip to bridge financing and land acquisition.
Munshi.Biz gives you specific solutions designed for easy, quick access to capital, flexible terms, and a streamlined process. But when looking for financing options, knowing the type of loan that best suits your goals will give you the confidence to move forward.
