Buying Rental Properties with Hard Money Loans Versus Non-QM Loans

Buying Rental Properties with Hard Money Loans

Gustan Cho Associates are mortgage brokers licensed in 48 states

This guide covers buying rental properties with hard money loans. We will also discuss the difference between buying rental properties switch non-QM versus hard money loans. What are hard money loans versus non-QM loans? The difference between non-QM and hard money loans is you can need the difference between hard money and non-QM loans following Dodd-Frank.

Hard money lenders cannot be in business if they follow DODD-FRANK regulations for primary owner-occupant homes. There are many rules and regulations for owner-occupant homes. Any one-to-four-unit residential homes can be owner-occupant properties if the owner intends to live there.

The benefit of hard money loans during the booming housing market is limited documents, or no-income docs, and fast closings. The cost and fees of hard money loans can get quite expensive versus traditional loans. Hard money lenders lend types of properties: condos, single-family homes, multi-unit family homes, and commercial properties. In the following paragraphs, we will cover buying rental properties with hard money loans.

Non-QM Versus Hard Money Loans Versus

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Buying rental properties with hard money loans can benefit real estate investors and developers. Many investors specializing in fix and flip housing rely on hard money financing. This is due to the limited paperwork required and the fast closing and funding.

Hard money loans are all short-term loans to be used for one reason or another for bridge financing. Most hard money lenders make the term of hard money loans for a term of one year. However, the borrowers can extend the loan term every year for a one year term.

Buying rental properties with hard money loans by real estate investors as a short-term bridge financing tool enables them to fund real estate projects quickly with a fraction of the paperwork required by banks and traditional commercial lenders. The good news is that Gustan Cho Associates now offers Non-QM Loans on investment properties where investors no longer rely on hard money loans.

What Are Hard Money Loans

Real estate investment presents many opportunities for wealth building and financial stability. To tap into this potential, it’s essential to understand the various financing options available, one of which is a hard money loan. A hard money loan is a short-term loan secured by real estate. Unlike conventional loans, they are funded by private investors instead of banks or credit unions.

Interest Rates On Hard Money Loans vary between 10% and 18%. 3% to as high as 18% in upfront fees is the norm on hard money loans. The number of points charged and interest rates depend on the risk of the project and other variables.

When underwriting the loan, hard and private money lenders are more concerned about the property than the borrower. Most Non-QM Mortgage Rates are lower than 10%. If private money borrower defaults on their obligations, private money lender forecloses. The foreclosure process on investment properties is much easier and quicker than the owner-occupant primary homes.

How Does Buying Rental Properties With Hard Money Loans Work

Hard money loans are not just used by investors with bad credit. Investors who qualify for bank financing also use hard money loans as well. Hard money is a popular loan program for fix-and-flip rehab projects.  Hard Money Loans have become popular for buntal properties because of their flexibility and speedy nature.

Hard Money Lenders will finance the acquisition PLUS the construction cost of the property. Real estate investors purchase vacant properties with hard money loans. 

Hard Money Financing is a short-term financing option that real estate investors use to fund their projects. Terms generally are for a minimum of 4 months to no more than two years. Buying foreclosures and properties from auctions. Traditional banks and lenders cannot finance properties that are not habitable due to needing repairs. Investors need quick funding for real estate purchases. Property-equity investors face foreclosure and need fast funding to save their property.

Cost of Buying Rental Properties With Hard Money Loans

What is the cost of hard money compared to non-QM loansHard money loans are generally more expensive than bank financing. Most real estate investors find hard money well worth its extra costs. This is due to the quick turnaround time and the limited amount of paperwork required. There are many instances where hard money can be closed in a week or less. Creative mortgage strategies for buying rental properties with hard money loans with zero money down by refinancing investors’ other properties. Non-QM loans are a fraction of the cost of hard-money loans.

Benefits of Buying Rental Properties with Hard Money Loans Versus Traditional Loans

Hard money financing is not just for real estate investors with bad credit or no income verification. Buying rental properties with Hard Money Loans is often used by many established investors with blue-chip real estate portfolios and triple-A plus credit due to the following reasons:

Long-term loans normally have high pre-payment penalties. If borrowers pay off a loan early, the lender will charge them a percentage of the loan balance.

Fast closing than traditional lenders. Hard money financing closes in less than four weeks (2 to 3 weeks is common) versus over 60 to 90 days with banks and traditional lenders. Interest on Certificate of Deposits, even long-term CD, is at less than 1.0%, where investors will take a loss when inflation is taken into the equation.

Types of Properties Hard Money Lenders Lend

Hard and Private Money Lenders also will fund the construction/rehab of the property where banks and traditional lenders will not. This can be quite costly. Investors may purchase a 10-unit apartment building where only 5 of the ten units are rented. The tenants may only be paying $500 per month. However, market rents after basic rehab are easily worth $1,000 per month. 

Some lenders have pre-payment penalties of 5% the first year, 4% the second year, and 3% the third year. Many investors buying investment properties do not want to go with long-term financing until the property has been stabilized.

Buying rental properties with hard money loans gives time for real estate investors to rehab the ten apartments. It gives investors time to rent it to tenants for a monthly market rent of $1,000. Investors then go for end long-term financing at a much lower interest rate. They can then pay off the hard money lender.

Difference Between Hard Money Versus Private Money Lenders

What is the difference between hard money and private lendersThe main difference between private and hard money is that a private lender is a private individual or group of private people. Most private lenders normally do not deal with the actual borrower. They will have a business agreement with a commercial mortgage broker. The mortgage broker will be the middleman between a private lender and borrower and make sure both sides are protected. Instead of the mortgage broker’s services, the broker gets a fraction of the upfront points as their commission.

Hard money lenders are companies in business that lend short-term loans based on the property without too much emphasis on the borrower. When returns on other investments are very low, people with liquid cash look at alternative investments such as private money lending.

Higher net-worth individuals are always looking for secure conservative, safe investment opportunities. Lending to real estate investors who have skin in the game (large down payment) is a secured, safe investment for higher net worth individuals. The borrower’s down payment secures the investment with skin in the game.

Advantages of Using Hard Money Loans

**A. Flexible Terms**. One of the main advantages of hard money loans is their flexible terms. Traditional lenders are often stringent with requirements and words, making it difficult for some real estate investors to get approval. On the other hand, hard money lenders offer flexibility as their loans are collateral-based. This means they can work out a loan
structure that suits both parties, regardless of the investor’s situation.

The Benefits of Fast Approvals on Hard Money Loans

Another significant advantage is the quick approval process. Banks and credit unions typically have a lengthy loan approval process that can take several weeks r even months. Hard money lenders can grant approvals within a day or two, and funds can be disbursed in less than a week. This speed is invaluable for real estate investors who act quickly on great deals.

Low Credit Score Requirements

Traditional lenders base their loan approvals heavily on the borrower’s credit score. However, hard money lenders focus more on the property’s value, making this an ideal option for those with less-than-stellar credit scores.

Disadvantages of Using Hard Money Loans

Higher Interest Rates. Despite the advantages, hard money loans have a fair share of drawbacks. The most apparent is their high-interest rates. Because these loans are viewed as riskier, lenders compensate by charging higher interest rates than conventional loans.

Hard money loans also often come with upfront fees or “points.” These are percentages of the loan amount that is paid at closing. These fees can add up and must be considered when calculating the overall cost of the loan.

Shorter Loan Terms. Another disadvantage is the short loan term. Most hard money loans must repay within a year or two, though some can extend up to five years. This short repayment period can be a challenge for some investors, especially if they encounter unexpected issues with their rental property.

How to Apply for a Hard Money Loan

Prepare Your Application Materials. To apply for a hard money loan, you’ll need to gather several documents, including proof of income, a detailed business plan for the rental property, and a comprehensive real estate portfolio.

Research Hard Money Lenders

Not all hard money lenders are created equal. Researching different lenders’ terms, fees, and reputations is important. An excellent place to start is by asking for referrals from other real estate investors or local real estate investment groups.

Submit Your Hard Money Loan Application

Once you’ve prepared your documents and found a lender you feel comfortable with, it’s time to submit your application. KeRememberJust so you know, because of the speedy nature of hard money loans, you’ll want to be ready to act quickly if approved.

Like any investment decision, weighing these advantages and disadvantages against your financial capabilities and investment goals is crucial.

The key to success in real estate investment lies in utilizing the appropriate financing option for each unique scenario. With the right preparation and research, a hard money loan could be your ticket to expanding your real estate portfolio and achieving your investment goals. It’s an option worth exploring as you chart your journey in the rental property business.

How Can I Qualify for Hard Money Loans?

Real Estate Investors who have a down payment on an investment property purchase can qualify for hard money loans. The hard money loan process is much easier than the residential mortgage process. Hard money lenders are more concerned about underwriting the property and not the borrower.

Most private lenders prefer lending money to people they know and trust. Hard money lenders are companies with their own lending guidelines and matrix and lend money based on assets, not the individual.

The borrower’s credit scores and income do not matter with hard money lenders. For investors who need to qualify for hard money loans for investment properties, please get in touch with Gustan Cho Associates at 800-900-8569 or text us for a faster response. Or email us at gcho@gustancho.com. We are available evenings, weekends, and holidays seven days a week.  In conclusion, hard money loans present a viable alternative to traditional financing for buying rental properties. While they do offer flexibility, quick approvals, and accommodate low credit scores, they also come with higher interest rates, shorter loan terms, and upfront fees. 

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