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Americans spent over $550 billion in 2022 on home renovations. These can be expensive, and many people had to finance their projects.
Hard money rehab loans are a type of financing that is used to purchase and renovate real estate properties. There are certain factors to keep in mind so you can make the most of them, though.
Here are the top things you need to know as a borrower.
1. Short Terms
Hard money rehab loans are short-term loans that are typically used for projects lasting 12 months or less. Be sure that your project timeline fits within this range before applying for one of these loans.
Otherwise, you may run into issues later on. For example, if you need extra time to complete the project, it may be difficult to find a lender who will provide additional financing. You might also have to deal with a higher interest rate.
At the end of a hard money loan, it is common to sell the property or refinance it with a traditional loan.
2. High Interest Rates
Hard money rehab loans come with higher interest rates compared to traditional loans. This is because they are riskier loans that require less paperwork and can be funded more quickly.
So, lenders charge a higher rate to offset the risks associated with these loans. Even though the terms for hard money loans are short, it’s still in your best interest to pay them off as soon as possible.
This will help you counteract the higher interest rates.
3. Strict Eligibility Requirements
These types of loans come with stricter eligibility requirements than traditional bank loans. To qualify for hard money rehab loans, you may need to have experience in real estate investing.
You might also be asked for a higher down payment and more collateral. However, this can vary between lenders. Some lenders are looser with their requirements, while others are more strict.
4. Quick Funding
Hard money rehab loans can be funded quickly, often within less than a week. This makes them ideal for time-sensitive projects, such as those that involve flipping properties. In order to help the process go as smoothly as possible, be ready to provide all of the necessary paperwork documents to the lender.
Common documents include bank statements, proof of income, and copies of the property title.
5. Collateral-Based Loans
These are collateral-based loans, meaning the loan amount is based on the value of the property being renovated.
So, you can expect to receive larger loans on properties with more equity and higher appraisal value. This doesn’t mean that people who own low-value properties shouldn’t pursue hard money rehab loans, though. This type of financing could be what you need to take your property to the next level.
6. Credit Score
Unlike traditional loans, hard money rehab loans are not based solely on your credit score. However, having a good credit score can help you get better rates and terms.
You can also improve your chances of getting approved by showing proof of your financials and having a solid investment strategy.
For those who struggle in other areas, boosting your credit score can go a long way. You can achieve this by paying off debts and making payments on time. Increasing your total credit limit will also help to raise your credit score.
7. Renovation Requirements
Hard money rehab loans require that the renovation work is completed within a certain timeframe and meets certain requirements. To clarify, make sure to ask the lender what type of renovations they will allow and how long you have to complete them.
This way, you can ensure that your project is successful and that you don’t run into any issues later on. It’s best to outline a clear plan for your project and have an experienced contractor ready to take on the job. This will help to ensure that all of the requirements are met and that you can stay on schedule.
8. Exit Strategy
It’s crucial to have an exit strategy in place when using hard money rehab loans. This means having a plan to pay off the loan at the end of the term, such as selling the property or refinancing with a traditional loan. Other forms of exit strategy can include finding a partner to help finance the project or getting additional investors.
By being prepared for all potential outcomes, you can maximize your profits and avoid any unnecessary losses.
Finding a Lender
Many people struggle to find hard money rehab lenders at first. When looking for one, be sure to research the lender and read customer reviews. You should also look for lenders that have a good track record and are experienced in the real estate industry.
Always make sure they understand your project. Compare fees and interest rates so you can make an informed decision.
Finally, ask questions and discuss your doubts with them before signing a contract. This will help you make sure that the lender is trustworthy and a good fit for your project.
The Upside of Hard Money Rehab Loans
Overall, hard money rehab loans can be a great option for real estate investors looking to fund renovation projects quickly. However, it’s important to understand the risks and costs associated with these types of loans before making your choice. This will help you avoid problems you may have otherwise encountered.
To learn more about investing in real estate (and other assets), explore the rest of this blog.