Purchasing real estate has changed over the years. Approximately 10-20 years ago, buyers simply had to prove that they had a source of income. However, after the recession and the crash of the real estate market, loan lenders have tightened their lending requirements and have increased the application process. Buyers of nontraditional real estate, including land, condo, or fixer uppers may especially have a harder time obtaining financing.
Traditional methods of financing
Traditional financing methods include first time homeowners (FHA) and conventional loans. These loans come from regulated lenders and have a different set of lending requirements. For example, if a real estate buyer wants to purchase property with a large down payment and great credit, they are likely to be approved for the conventional mortgage. Buyers that are first time homebuyers and do not have as much of a down payment may find the FHA loan to be more achievable. However, neither of these loans is appropriate for fixer upper homes or for the purchase of land. They are also not available to real estate investors.
Alternative methods of financing
Fortunately, there are alternative methods of financing available for those in unique buying situations. Buyers that want to purchase a property that needs a lot of work can obtain a construction loan. Buyers that want to purchase land can apply for a loan that is specifically for purchasing and building on empty land. Real estate investors that want to improve a property or piece of land can apply for a loan with a private hard money lender. Private money loans differ from traditional mortgages because they are usually backed by an individual and have much stricter of repayment requirements.
What is a hard money loan?
Hard money offers higher hard money loan rates and lower loan to value ratios. Hard money interest rates can start at 15%, 18%, or higher. Because real estate investors are not living in the property and will quickly turn it around, these interest rates are acceptable. In fact, they are a great way to obtain a large amount of money in a short amount of time. Private hard money lenders also do not have to worry about tying up their money for a long period of time. If they do, they will receive large interest payments in return.
Another difference between private hard money lenders and traditional mortgages is that the loan is also secured by property. When a traditional buyer purchases a home and defaults on the loan, the property simply goes back to the lender. When it comes to private hard money lenders, however, the property is also secured by another property. Because the property with the loan is not yet built or is not yet in a profitable state, the loan is secured by another property. This could be the investor?s personal home or another investment property. Most hard money loans are secured by a property with 30% to 50% equity, so the investor is well protected.
The importance of quick repayment
There is no rush to quickly pay off a traditional mortgage. You simply make your monthly payments and the longer you have the loan, the more equity you build. With hard money loans, it is important to pay it off as quickly as possible, to prevent the possibility of losing money. Duration or payment period for a private loan is also shorter compared to the traditional loan which can usually go from 1 year up to 20 years while private loans can only be granted with a duration of up to 5 years. The bottom line is to pay it off as quickly as possible.
The real estate buying process has changed dramatically over the years. While it was once simple to purchase real estate, the process now has increased requirements and greater restrictions. Private hard money lenders assist those purchasing nontraditional types of real estate, but have faster repayment requirements and may not be the best loan for all buyers. However, it is a financing option for some and is important to the real estate industry.