Buying your dream house isn’t easy. It may be one of the most expensive investments you’ll make in your life. There are so many aspects you have to consider before settling on the perfect one. Sure it’s important to check which school district, shopping center, and hospital are the closest. But even before you can sign the papers, you need to make financial decisions on the property.
To proceed with confidence, you need to know what your options are.
What are your choices?
Some lucky home buyers have the opportunity to purchase real estate through an all-cash deal. There are no loans or financing contingencies. The purchase agreement document is very straightforward. Payment is completed through cashier’s check or the transfer of funds. This could be done before or at the time of closing.
But don’t miss out on buying the house of your dreams in Dallas just because you do not have sufficient funds. Traditional sources include acquiring a loan from a community bank or local credit union. Other alternates are readily available such as crowdfunding, HELOC (home equity line of credit), FHA 203K loans, and private money lenders Dallas area. One option that is gaining considerable attention these days is HML (hard money loans).
Hard money loans
HMLs are loans for real estate business investment purposes. They are ideal for investors who have experience in buying a property with the intent of renovating it and selling it to make a quick profit. Such short term loans carry high-interest rates.
Unlike other mortgages, they are tied to the value of the property that is being purchased. Since these loans have a relatively easy qualification process, buyers can close very swiftly. For many, this is enough to justify the high costs associated with the loan.
Is it the same as cash?
Hard money loans are not solely cash loans. If a seller demands cash-only, they may not agree to an HML. Cash has the power to guarantee a close. There is no risk that the financing will fall through.
With a hard money loan, there is a possibility of hiccups later on. Just like any other loan, they are subject to approval, inspection, appraisal, etc. Any of these reasons may cause an application to be denied while in escrow.
However, there is always room for negotiations. And though not entirely the same as cash, an HML can help settle a deal. According to nerdwallet.com, the average closing time for purchase and refinance loans combined is about 43 days. Because HMLs have shorter processing times than traditional loans, it allows people to respond to investment opportunities quickly. In most situations, hard money loans can be funded within a week, states Retipster.com.
So in a way, HML can be considered just the same as cash. Hard money loans and all-cash offers are both fast and flexible alternatives when purchasing real estate.
Who should use hard money loans?
HMLs are great financing tools for investors. They are typically extended to those who have experience in buying and selling a property. With the right plan, you have a chance to make a decent profit. Ideally, they are perfect for:
- Fix and flips
- Property developments
In both cases, hard money lenders will want to see where you intend to use the funds. They may even offer advice on renovations that create the most return to the value of the property. Consider some of the following home renovations that have the highest ROI.
Pros of hard money loans
- Loans are quickly approved. There is less paperwork involved, so processing times are shorter. The following documents will be needed:
- Your executed contract
- Your repair estimate
- The appraisal we will order
- Your insurance binder
- Title company docs
- There is less red tape. Since the loan is a collateral-oriented and is secured against the property, there is less focus on the borrower’s credit than say a conventional mortgage lender does.
- There is more flexibility. Traditional money lenders often don’t permit applicants to utilize borrowed funds for down payments. HML policies are flexible and do not offer such restrictions.
- Funds are released relatively quickly. HMLs are short term loans. It allows projects to start and finish faster.
- You need to pay only a fraction of the property’s price as a down payment. Hard money lenders usually abide by a 60% to 80% loan-to-value ratio (LTV). This leaves a considerable amount of capital open for other investment opportunities.
Cons of hard money loans
- Lenders charge a high-interest rate. This is a high investment project, and lenders know that.
- Loans are for a short period of time. Hard money loans tend to be for 6 to 24 months. If the work is not completed on time, or the property does not sell, there may be additional charges.
Pros of all-cash offers
- There are no mortgages or interest involved. Funds are appropriated from the buyer’s savings accounts, retirement funds, checking accounts, cash from investments, etc. It saves money because there are no loans to pay off at an extra cost.
- Deals close faster. Since there is no need for inspections or appraisals, deals can proceed at a faster pace. There is less paperwork.
Cons of all-cash offers
A substantial amount of funds will be invested at once. If the borrower has taken a loan against a life insurance policy or equity on other properties, he will still have to make payments until the property is sold.
It’s a wrap
HMLs are not the same as cash. But they carry much of the same weight. So this is your chance to make the most out of the flourishing real estate market. Remember to have a well-thought-out exit strategy.
Consider building a long-term relationship with a reliable hard money lender. This is your chance to continue making a sizeable amount of money.
Evie Harrison is a blogger by choice. She loves to discover the world around her. She likes to share her discoveries, experiences and express herself through her blogs. Find her on Twitter:@iamevieharrison