If you have low credit, you might think you have few options for investing in real estate. However, many types of loans exist for individuals with low credit scores. 

When applying for investment property loans, traditional lenders look at your credit, finances, and job history to determine your ability to repay the loan and evaluate risk. While some individuals don’t qualify for a conventional mortgage, they might qualify for a subprime mortgage. 

Individuals may obtain subprime mortgages with lower credit scores, making them a greater risk to the lender. Unfortunately, these loans often come with higher interest rates, which can rise significantly over time. Still, many borrowers can benefit from these loan offerings, but they have pros and cons. So what is a subprime loan and, more importantly, is it the right option for your next real estate investment?

• What is a subprime mortgage? 
• Prime vs. subprime loans 
• Pros and cons of subprime loans 
• Subprime mortgage types
• Key takeaways 

What is a subprime mortgage?

Whether you flip a home, purchase a rental property, or become a first-time homeowner, you likely need a mortgage. Unfortunately, obtaining a mortgage loan with bad credit can be challenging. Luckily, many lenders offer subprime mortgages that cater to individuals who might not meet the criteria for a conventional loan. A subprime mortgage is ideal for borrowers with low credit scores who might not qualify for another type of loan. These mortgage programs are designed for borrowers who present more of a risk, meaning they have a higher chance of defaulting on the loan. 

Prime vs. subprime loans

Mortgage lenders usually rate borrowers depending on the risk level, with higher scores denoting a borrower’s ability to repay the loan easily. For example, individuals with good credit are given a rating of A, with those with no ability to repay and higher risk receiving an F. Prime mortgages are for individuals rated higher, while lower-rated borrowers typically receive subprime or no loan. 

To receive a higher rating, you must have a credit score of at least 680, a good debt-to-income (DTI) ratio of lower than 35%, a 20% down payment (depending on mortgage program and lender), and verifiable documentation of income, job history, and assets. The stringent requirements for conventional loans make investing in real estate much more challenging for individuals who fall just outside the requirements, even if they can prove their ability to repay. However, subprime mortgages can help individuals of all types invest in real estate by allowing them to qualify for a different type of mortgage. 

Unfortunately, subprime loans come with less favorable terms compared to prime mortgages and are often more expensive in the short- and long-term due to higher interest rates. However, subprime mortgages might be good for borrowers who want to purchase a primary residence or enter the world of real estate investing with lower-than-average credit scores. 

Pros and cons of subprime loans

Before applying for a subprime loan, borrowers must determine whether they can repay it. Unfortunately, some subprime mortgage borrowers don’t. Since they can’t predict how their interest rates will change, they’re subject to defaults that can affect their ability to purchase property in the future. 

Subprime mortgages are ideal for individuals with lower credit scores that are considered a higher risk to lenders. However, they’re not the right choice for everyone because they come with higher interest rates and fees. Below we go into more detail about the pros and cons of taking out a subprime loan. 

Advantages of subprime loans

Subprime mortgages can improve a borrower’s chances of getting approved for a loan, whether for a primary residence or investment property, allowing people to start investing in real estate earlier. Pros of subprime loans include the following:

• Easier approval: Since subprime loans are for individuals considered riskier borrowers, they can make it easier for individuals with low credit scores to purchase a home and start investing in real estate without spending years improving their credit scores. 
• Credit score improvements: Making on-time mortgage payments can improve credit scores, which can help borrowers get better loan terms in the future. 
• Create a path to homeownership: Homeownership is a dream for many people. Although a subprime mortgage may not offer terms that are on par with prime loans, they do allow you to purchase property for yourself. 
• Interest rate limits: While subprime loans tend to have higher interest rates than prime loans, there are some government regulations in place that effectively cap interest rates on these types of loans. 

Disadvantages of subprime loans

Unfortunately, some borrowers default on subprime loans because they haven’t demonstrated an ability to repay. Additionally, since many of these loans are adjustable rate mortgages (ARMs), borrowers can’t predict how much their mortgage rates will change or how expensive their loans will be over time. 

Even though subprime mortgages can help individuals with lower credit scores purchase property, there are several disadvantages, including the following: 

• Higher interest rates: Since borrowers are considered a higher risk, subprime mortgage lenders usually have higher interest rates to protect themselves if the borrower can’t repay. 
• Larger down payments: Subprime loans come with larger down payments because the borrowers are considered higher risk. This larger down payment is another way subprime mortgage lenders protect themselves if the borrower defaults on the loan. 
• Smaller loan amounts: Since subprime mortgage borrowers have poor credit and, therefore, are a higher risk, lenders may offer smaller loan amounts to mitigate the risk of default. 
• Higher fees: Lenders may also charge higher fees on the loans to recoup any money lost if the borrower fails to repay. 
• Longer repayment periods: Subprime mortgage loans may take longer to pay off than prime loans, which can reduce monthly payments but means you’ll pay more over the life of the loan because of interest. 
• Adjustable interest rates: Subprime mortgages are usually adjustable instead of fixed-rate loans, which can lead to increases in payments and the loan as a whole. 
• Income requirement: While borrowers can get subprime mortgages with lower credit scores, income is still a determining factor for qualifying for the loan. Therefore, borrowers must provide documentation that they earn enough to pay the monthly mortgage payments. 

Subprime mortgage types

There are several types of subprime mortgages for borrowers with low credit scores, including:

• Adjustable-rate mortgages (ARMs): As we’ve mentioned, most subprime mortgages are adjustable-rate loans, which means how much you pay will change depending on the market. ARMs usually start with a lower rate before shifting, which can dramatically increase your monthly payments and total loan amount. However, ARMs adjust rates based on market indexes, so market conditions can also cause your interest rate to drop. 
• Interest-only loan: Interest-only subprime mortgages allow borrowers to pay only the interest due on the loan for an initial repayment period, which varies by lender. At the end of the interest-only period, the borrower can renew or refinance the loan to pay down the principal. When borrowers only pay the interest, their monthly payments are much lower for an initial period of time. However, once that period ends, they must pay the interest and loan balance. An interest-only loan is a good option for individuals who believe their income will increase in the next few years. Unfortunately, they can also be risky because interest rates can get so high borrowers can no longer afford to repay their loans. 
• Fixed-rate: While most subprime loans are adjustable-rate mortgages, some lenders might offer fixed-rate loans. Fixed-rate loans offer borrowers a level of security since the interest rate is locked in and won’t change unless the borrower decides to refinance. 
• Dignity mortgage loan: A dignity mortgage loan is a subprime in which borrowers pay higher interest rates for a few years, much like a traditional subprime loan. However, borrowers can have their interest rates reduced after they prove their ability to repay their mortgage by making on-time payments over a set period. Also, the additional money paid in interest goes towards the loan balance with an interest rate similar to a conventional mortgage. 
• Negative amortization mortgages: Most mortgages have positive amortization, which means you pay the interest and loan balance, while the loan amount decreases each month. However, negative amortization is the opposite. With these loans, borrowers don’t pay enough to cover interest, so their balance will continue to grow with rising monthly payments. 
• Balloon mortgage loans: Balloon mortgage loans allow borrowers to pay small amounts for the initial loan period, which means their loan balance will grow over time. Eventually, borrowers must make a large payment to repay the entire loan once the loan period expires.

Key takeaways

Subprime loans can help borrowers obtain a mortgage loan. However, the risks outweigh the benefits in many cases because the loans are much more expensive in the long run, and many borrowers end up defaulting. Subprime mortgages aren’t the right choice for everyone, and it’s always best to do your research and, if possible, work on improving your credit score so that you can qualify for a lower rate and better terms. 

If you have a low credit score, you still have options. Hard money loans from Source Capital are designed for borrowers with less-than-ideal credit. Unlike banks and traditional lenders that might deny your application if you have a low score, we focus more on property equity than your financial history. As a result, hard money loans are ideal for real estate investors of all types, allowing you to fix and flip or purchase commercial property. Wondering if a hard money loan is right for you? Contact us or apply now. 

Becoming a real estate investor is a lucrative opportunity, especially if you invest in rental properties. Unfortunately, many potential investors don’t know where to look for funding. You may consider traditional mortgages only to find they don’t fit your needs, especially when you need financing fast to allow you to turn a profit as quickly as possible.

Whether you’re fixing up a rental or purchasing one ready to rent, you need a way to finance the property, especially if traditional lenders have turned you down. When looking for ways to fund your investment, you have many rental loan options, including hard money loans. Hard money loans for rental properties can allow you to easily purchase property to diversify your portfolio, and they have their benefits over other funding options.

Hard money loans for rental properties can help you secure the cash you need to start turning a profit as soon as possible, but what are hard money loans for rentals, and how can they benefit you? Keep reading to learn more. 

What is a hard money loan?

A hard money loan is a type of asset-based loan secured by collateral. When using hard money loans for rental properties, the collateral or assets are the real estate property you’re investing in. Therefore, if you don’t pay back the loan according to the terms, you’ll forfeit the property to the lender for them to recoup their losses. 

Hard money rental loans are short-term non-conforming loans used solely to purchase commercial or investment properties. They don’t come from traditional lenders like mortgage lenders or banks. Instead, they’re offered by private hard money lenders that accept the property as collateral. 

Investors typically turn to hard money loans after having their mortgage application denied to avoid lengthy mortgage approval processes. Like a traditional mortgage loan, hard money loans are secured and guaranteed by the purchased property. However, hard money loans have less strict requirements and faster approval processes, unlike traditional mortgages. 

In addition, what makes hard money loans for rental properties different from other loans is that the approval doesn’t hinge upon a borrower’s creditworthiness. Instead, hard money lenders for rental properties use the value of the purchased property to determine whether or not to approve a borrower for the loan because if the borrower defaults on the loan, the lender can always sell the property. 

Hard money loan benefits

There are several benefits to using hard money loans for rental property.

• Faster funding: These loans offer a faster loan application process and less stringent criteria to make it easier to get approved fast. Faster funding can help rental property investors stick to strict schedules and start renting units faster to allow faster time to profit. 
• Flexible terms: Compared to traditional mortgages, hard money loans have more favorable and flexible terms. Since hard money lenders aren’t banks, you may have room to negotiate. For example, Source Capital looks at every loan application on a case-by-case basis to work with you to determine whether you’re eligible for the loan. In addition, by working on a more personal level with a lender, you may be able to negotiate repayment terms based on when you’ll be able to turn a profit on your rental property. 
• Convenient: Hard money loans for rental properties are more convenient and less time-consuming than traditional mortgages. The application takes less time, and the underwriting process is much shorter. It can take months to close on a mortgage loan, but hard money loans typically close in a few weeks at most. 
• Lower credit scores accepted: While hard money lenders look at credit scores to ensure borrowers will be able to repay the loan, credit scores are less of a factor. Instead, hard money loans are based on the value of the real estate deal. 
• Collateral: The collateral for hard money loans for rental property is the property itself, but some lenders may be more flexible, allowing you to secure the loan using personal assets like residential properties. 
• Little down payment: Many hard money loans for rentals require little to no down payment, focusing on the property’s value instead. However, the down payment requirement varies from lender to lender, and some lenders may require a higher down payment, depending on the value of the property. 
• Higher loan amount: Rental properties aren’t cheap, and depending on your credit score, you may not qualify for a loan from a bank. Hard money lenders for rental properties offer loan amounts that are higher than traditional lenders, which can help you pay up to 100% of the property’s purchase price. 

Disadvantages

All loans for rental properties have pros and cons. However, hard money loans are typically more attractive to investors because they have few disadvantages. 

The most significant disadvantage of a hard money loan for rental property is that they have higher interest rates than conventional loans because hard money lenders for rental properties take on more risk. Additionally, because they’re short-term loans, they have a shorter repayment period, so they’re typically best for investors who can make a quick profit. 

Hard money lenders for rental properties

Hard money lenders for rental properties approve the loan based on the property’s value, allowing the process to be faster than traditional loans so you can get your money in a few days instead of a few months. But, of course, this means more risk for the lender, so you can expect higher interest rates and shorter repayment periods. 

Ultimately, funding speed, interest rates, and loan terms vary between lenders and depend on the deal. Your particular needs will determine the type of terms you can expect, so you should do your research to find the best interest rates with each lender. 

When looking for a quality hard money lender, there are a few things to consider, including: 

• Reliability: Unfortunately, anyone can call themselves a hard money lender if they have lending capital. Therefore, it’s important to do your research to determine whether you’re working with an individual or company you can trust. Review the online reviews of possible lenders to know what to expect. In addition, if you can contact someone who has worked with the lender before, you can learn about their positive or negative experiences. 
• Speed of funding: Funding speed may be important, depending on your project. Some rental property purchasers need funding fast, depending on their project timelines. Hard money lenders will typically tell you how fast they can fund your loan once you’re approved, so feel free to ask them or search their websites for an answer. 
• Interest rates: Loan interest rates vary depending on lender and loan type, so you’ll need to discuss potential rates with different companies or individuals to learn about your options. Since interest rates could impact the profitability of your project, they’re an important deciding factor.
• Terms: Hard money lenders also have varying loan terms, with some offering longer terms than others. The best thing you can do is find a lender who will match your needs. Luckily, most lenders are flexible, so you can give them a call to discuss your needs and see if your terms are possible. 

Once you’ve found a hard money lender for your rental property purchase, you can typically apply online and get approved within 24 hours. Your loan will then be funded in a few days. 

Hard money loan requirements

Getting a hard money loan is much simpler than other types of rental property loans. Since lenders gauge the borrower’s potential to repay the loan in time, they’ll look at the property’s value and what it will rent for instead of other requirements. 

Hard money lenders must determine the deal’s profitability to approve you for the loan instead of focusing solely on the collateral and your credit history. Lenders will still vet you by reviewing your creditworthiness, but the most important part of the deal to them is the project. Since there are no requirements that are the same across lenders, most lenders look at each application individually to determine whether or not to approve a borrower for the loan. 

Applying for hard money loans

Hard money loans can be a better alternative to traditional mortgages if you want fast, flexible funding. Every hard money lender for rental properties is different, so it’s important to do your research to find the best one to suit your needs. 

Source Capital makes it easy to apply for a hard money loan. You can apply online in as little as ten minutes. Then, we’ll let you know if you’re approved within 24 hours, and you can expect your loan to be funded in a matter of days, not weeks. We offer fast approvals and have a proven track record of delivering on our promises. 

Wondering if a hard money loan is right for your next rental property purchase? Contact us today to learn about our loan offerings. We can help you determine if we’re the right partner for your next real estate investor.

Real estate transactions can be very expensive. That is why there are plenty of loan options available. One option is a swing loan, which is also referred to as a bridge loan. This is a loan that can be useful for certain people in some situations. Learn more about how a swing loan works below, and be sure to reach out to a real estate professional who can help you understand the benefits and drawbacks of each individual option.

What is a Swing Loan?

A swing loan, which is also called a bridge loan, is a specific type of loan that is frequently used to help you transition from one situation to another. Even though you may have to take out a loan to purchase the property, you may also need some extra funding to help with your moving expenses. Or, if you have to stay in another location in between your prior residence and your new one, you might incur some additional expenses. A swing loan is a short-term loan that can help with that.

A swing loan is a specific source of funding or capital that you can also use to cover your expenses until you secure permanent financing for your new home. Or, you may have an existing debt obligation that you need to take care of. In general, these are loans that will last approximately six months to one year; however, they can be customized to meet your needs, just like other types of loans.

It is true that most people would prefer to wait until their house is under contract before placing an offer on a new one; however, there are some situations where this might not be possible. Everyone is on a slightly different timeline, and waiting that long might not work for you. For example, there could be a situation where you need to move for work right now. Or, there could be family situations that require you to vacate your current house quickly to move somewhere else. With the market as hot as it is right now, you might believe that it is better to purchase a new property now and then sell your current one down the road. A bridge loan can help you with that.

If you aren’t able to sell your house quickly enough before you can purchase a new one, a swing loan can help you cover the expenses, providing you with the funds you need to move forward on the purchase of your new home before you can sell your current one.

A bridge loan can give you access to additional money that you can use to purchase property, allowing you to tap into an additional source of capital until your current home sells.

How Does a Swing Loan Work?

What is a bridge loan or swing loan? If you are in a tight spot, and you need to make a sudden change to where you live, then a swing loan can help you. Similar to other loans, the terms and conditions of a swing loan can vary significantly from person to person. You can customize the terms of the loan to meet your needs. 

In some situations, you might use a swing loan to pay off your current mortgage, while other types of swing loans are simply taken out in concurrence with your current mortgage. Furthermore, there are some situations where you might need to make a monthly payment on your swing loan, and there are other situations where you might not have to make a payment until you sell your current house.

In general, there are two separate categories of options to consider if you are interested in a swing loan. They include:

• Second mortgage: You might be interested in using a swing loan to act as a second mortgage for a short amount of time. Essentially, you will use a swing loan to put a down payment on your new house without having to sell your current house first. This means that you might not have to make offers on new houses that are contingent on you selling your current one.
• Pay off the first mortgage: You can use a bridge loan to pay off your current mortgage before using the remaining money to put down a new down payment on your next house. This means that you do not have two mortgages at the same time, as you can use your bridge loan to pay off the first one.

The exact terms and conditions will vary depending on the category of bridge loan you choose. Some of the most common terms and conditions of a bridge loan include:

• The vast majority of bridge loans will last between six months and a year.
• Most swing loans will be secured using your current house as collateral. That way, you can qualify for a lower interest rate on the loan.
• In general, the interest rate on a swing loan will be slightly higher than the current prime rate.

As you go through the process of applying for a bridge loan, you will probably notice that the process is the same as applying for a mortgage. For example, your credit score, debt-to-income ratio, and your loan-to-value ratio will impact whether you will be approved for your swing loan. This means that if you do not have at least 20% equity in your current house, you may find it difficult to apply for a swing loan. That is why it is important to work with a trained professional who can walk you through the process and put you in the best position possible to be successful.

Swing Loan Advantages and Disadvantages

Before you decide if a swing loan is right for you, it is important to think about the benefits and drawbacks. There are a lot of benefits that come with applying for a swing loan. Some of the biggest benefits include:

• The opportunity to purchase a new house before you sell your current one.
• The freedom to make an offer on a house without having to place a sale contingency on any offer that you made. This can make it easier for you to get an offer accepted in a hot market.
• Additional funds that you can use if you have to transition suddenly. It is particularly helpful if you have to move immediately for a job.
• If there is a lot of uncertainty in your life right now, you can use a swing loan as a source of capital to make the process easier.
• With certain swing loans, you may not have to make any monthly payments for the first few months.
• Depending on your financial situation, you may be able to defer payments entirely until you sell your current property.

Because there are a lot of benefits that come with applying for a swing loan, they have become a popular option for certain people in some cases. However, it is important to think about the drawbacks of a swing loan as well. Some of the most important drawbacks that you should keep in mind include:

• Typically, a swing loan has a higher interest rate than a conventional mortgage.
• Because a lot of people use a swing loan in conjunction with another mortgage, it is virtually required for someone to have 20% equity in their current house before a lender will give them a swing loan.
• In most cases, you can only get a swing loan if you are in the process of applying for a new mortgage.
• With a swing loan, you may have to deal with two mortgages at the same time, which can be stressful for some people.
• The financial burden can be a lot for some people to take on, and there are some people who may fall into foreclosure on their first property.

Because you are taking on additional debt by taking out a swing loan, it is critical to make sure that you are in a stable financial situation and can handle two large loans at the same time for a short while. It is important to understand that there are a few alternatives to consider as well. They include:

• Taking out a home equity loan. You can borrow against the equity in your home, using it to cover your expenses or put a second down payment on a house.
• Using a home equity line of credit. This could help you secure a better interest rate and lower closing costs, but you might face some prepayment fees if you decide to pay off your home equity line of credit early.
• Consider a personal loan. You can secure this loan with other personal assets to get a lower interest rate, helping you avoid using your house as collateral, if you choose.

Because there are so many options on the table, it is important to work with a professional who can help you.

Source Capital Funding Can Help With Your Swing Loan

If you are looking for hard money borrowers who can help you with your bridge loan mortgage, we can help you. At Source Capital Funding, we provide you with access to a hard money broker who can provide a wide variety of loans, including fix and flip loans. A residential hard money lender can help you get through difficult times, so contact us today to speak to a member of our team.

Real estate fills an important role in many investment portfolios. It can be a useful hedge against inflation, and there are many tax incentives for investing in real property. And, more than most other investments, real estate offers opportunities to leverage investment with investment property loans.

Some investors will buy and hold land for future development. Others prefer to fix and flip, realizing the potential in previously neglected properties.

There are investors who will buy a home for an elderly relative, enjoying appreciation when they eventually sell the property. Others invest in rental properties to secure a passive income stream that lasts for years, or even decades.

But there is a significant downside to investing in real estate. Although it is possible to buy shares in real estate investment trusts, owning a property outright, using all of your investment acumen and taking full advantage of a rising market, requires a major investment of capital.

Most real estate investors don‘t finance their purchases entirely with their own funds. They rely on investment property loans.

There are three major kinds of loans for investing in real estate. There are hard money loans (often known as fix and flip loans), bank secured loans (including home equity loans), and private money loans. We will mention some other kinds of funding briefly.

We will discuss each of these types of loans in detail. But first, let’s review the definition of an investment property.

What Is An Investment Property?

Investment property is real estate purchased with the intent of realizing a gain on its future sale, a stream of rental income, or both. Individuals, partnerships, and corporations may own investment properties.

The definition of an investment property is straightforward except in the case of second homes.

It’s important to understand that your investment property is not a second home.

The IRS rule is that for a property to be your second home, you must live in it at least 14 days a year. Also, you must live in it at least 10 percent as many days as you rent it out.

Here are some examples of how that works:

• If you use a property for just one week in the summer (7 days), and you rent it out for a month, it is not your second home. The reason for this is that you did not stay in it for 14 days.
• If you spend the whole month of July (31 days) in your mountain cabin, and you rent it out for August and then close it up for the winter, it can be treated as a second home. You are staying in for more than 14 days and for more than 10 percent of the total days you rent it out.
• If you stay in your beachside condo for 30 days every summer, and offer it on AirBnB the other 335 days of the year, it is not a second home. That’s because you do not stay in it 10 percent as many days as you rent it out.

Why does this definition make a difference?

• You have to report rental income on your federal income tax return, unless you are renting out a second home for less than 15 days a year.
• You can deduct at least part of your maintenance expenses from your rental income. You prorate the deduction. For instance, if you live in the property 25 percent of the time and you rent it out 75 percent of the time, you can deduct 75 percent of your maintenance expenses from your rental income on your tax return.
• You can’t deduct home mortgage interest on a second home, but you can deduct home mortgage interest on an investment property. You can also take depreciation on an investment property, although you can’t take depreciation on your investment property. You have to recapture depreciation on your investment property when you sell it, but it’s recaptured at (lower) capital gains rates and written off at (higher) income tax rates.

There are also major differences in financing a second home and financing an investment property.

You can get a VA loan for a second home. You can’t get a VA loan for investment property (although you can convert it after you have lived there).

You will usually have to pay 20 percent down to get a mortgage on a second home. Lenders usually require 30 percent down to get a loan on investment property.

Future rental income doesn’t figure into your creditworthiness for a loan for either a second home or an investment property. Banks usually look at how easily you can make the payments on an investment property from your other income, and they expect higher credit scores and better credit history before they make a loan.

But you don’t necessarily have to get your funding for an investment property from a bank.

Securing Funding For An Investment Property

There are several types of loans for investment properties. Different kinds of loans have different lending criteria. Choosing the right kind of financing makes a huge difference in the profitability of your investment, so it is important to keep these basic principles in mind:

• You can finance an investment property with the equity in your home.
• You can use a gift of funds to make a downpayment, but it has to be documented as a gift.
• It’s not unusual to borrow money to fix and flip distressed properties. You are probably aware of this practice as flipping.
• Hard money loans close faster and have looser lending requirements than conventional loans. It is often possible to close a hard money loan in just a few days. This allows you to take advantage of competitive opportunities in the real estate market. You can’t get hard money loans at banks.

Hard Money Loans

If you are looking to fix and flip, a hard money loan may be your best option.

Hard-money loans are short-term loans. They are designed to give you the capital to rehabilitate real estate so you can get it on the market for a profit.

Both residential hard-money lenders and commercial hard-money lenders make loans come due in two to 12 months. They are easier to get than conventional bank financing, but they also come at a higher interest rate. Your experience with the lender will affect your rate. 

Hard-money borrowers need to understand that hard-money loans don’t finance 100 percent of the cost of your fix and flip. There are two different ratios that hard money lenders use to calculate how much money they will lend on your project, LTV and ARV.

LTV, or loan to value, is used to make a loan for a percentage of the current value of the property you want to fix and flip. The LTV is usually 65 to 80 percent of current value.

ARV, or after repair value, is used to make a loan for the appraised value of the property after you have renovated it. The ARV is usually 70 percent of the appraised value.

Lending rules for hard-money loans vary from state to state.Source Capital is a premier source of information about the hard-money loans that may be available to you where you live.

Bank Secured Loans

A bank-secured loan is a loan secured by property you already have. It’s not a loan on the property you intend to buy as an investment.

For instance, a bank might be willing to lend you the money you need to buy an investment property with your equity in your home as collateral. Or it might secure your loan with another property you already own.

If you don’t make your payments on your investment property loan, the bank may take the property you put up as collateral. More often, however, you can work out refinancing at a higher interest rate, at least once or twice, although this is not guaranteed.

As we mentioned earlier, bank secured loans don’t cover the entire purchase price of your investment property. You will probably still have to come up with a down payment of 30 percent. You will also need to be able to show the bank that you can make your payments without any income from your investment.

Private Money Loans

Private money loans are exactly what they sound like. They are (usually) unregulated loans from private individuals to investors that are negotiated without following the rules that apply to banks.

Banks are required to take care to lend only to those individuals they are reasonably sure can pay them back. Private lenders may take risks that other lenders will not. But they usually charge considerably more interest, and they always have an exit strategy. Your private lender may sell you a loan to another investor for aggressive enforcement of its terms.

It’s important to know who you are dealing with. You don’t want your project to collapse because your private lender provides enough money to start your project, but not enough to finish it.

Other Kinds of Funding

Some real estate investors get their financing through crowd funding. Crowdfunding sites, however, usually do not provide 100 percent of financing.

A few investors are able to finance their projects through unsecured lines of credit, but the interest rates on this kind of financing take a considerable bite out of profits. Lines of credit are completely inappropriate for buying long-term investments.

What type of loan is best for investment property? Let’s take a closer look at some frequently asked questions.

Types Of Loans For Investment Property: FAQ

Is it harder to get a mortgage for an investment property?

It’s considerably harder to get a mortgage for an investment property than it is to get a mortgage for a residential property. Most lenders want rock-solid documentation of your income, and expect you to have held your current job for at least two years. They will also look for evidence that your income exceeds your expenses, and a high credit score.

It can be tempting to try to get a second-home loan for your investment property. Don’t do this. If your lender finds out that you misrepresented your intentions in getting your loan, you may be found to be in default.

Can you use a conventional loan to buy an investment property?

You can get conventional bank financing for investment properties, but you will have a higher down payment and have to meet stricter qualifications.

How much will the bank lend me for an investment property?

If you qualify for a bank loan, you are most likely to be approved for 70 percent of the purchase price. If you are looking to fix and flip, a bank loan may not be the best type of loan for investment property.

Final Thoughts

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A common question for many looking into real estate is, “what is hard money?” The definition of hard money is any money that’s backed up by a physical asset, such as gold or silver. Hard money loans are a type of loan that’s backed up by real property. Because this money is backed up by a physical asset, it’s thought to retain its value better than soft money.

There are numerous benefits to choosing a hard money loan over a traditional loan, including faster loan processing and less scrutiny of your credit score and debt-to-income ratio. However, it’s important to understand what you’re getting into before you secure a hard money loan. If you’re considering a hard money loan, here’s a quick guide to hard money loans and what you need to know before you secure one.

• What Is a Hard Money Loan?
  • Hard Money Loans vs. Traditional Loans
• What Is a Hard Money Lender?
• What Are Hard Money Loans Used For?
• Pros and Cons of Hard Money Loans
• The Bottom Line: What Is Hard Money?

What Is a Hard Money Loan?

Hard money loans are loans that are backed up by some sort of physical property. These are typically short-term loans that come with different terms than traditional loans, which may make them a better option for some borrowers. If you have a difficult time securing a traditional mortgage loan, you may be able to opt for a hard money loan instead that’s issued by a lender in real estate. In many cases, hard money loans are used to secure the funding needed to invest in houses for house flipping.

Hard Money Loans vs. Traditional Loans

There are several key differences between hard money loans and traditional loans. While many people use hard money loans because they’re not able to qualify for a traditional loan, there are certain benefits that may make hard money loans a better option for some. Here’s a comparison of hard money loans and traditional loans.

With a traditional loan, lenders look at your credit score as well as your debt-to-income ratio to decide whether or not to offer you a loan. If your credit score isn’t great or your debt-to-income ratio doesn’t look right on paper, there’s a chance you might not be able to qualify for a loan. That being said, traditional mortgage loans offer low interest rates and favorable repayment terms, so they can be a good option if you qualify. These loans are typically paid off over a 30-year period.

Hard money loans are a little different because lenders don’t focus on your credit score and debt-to-income ratio as much. This means that individuals who can’t qualify for a traditional mortgage may be able to qualify for a hard money loan instead. Unlike traditional mortgage loans, hard-money loans are repaid over a shorter time period that may be between 6 and 18 months. 

Whereas traditional loans focus on debt-to-income ratio to determine your eligibility, hard money lenders look at the loan-to-value ratio (LTV), which determines the value of your asset compared to your loan. For example, if you’re flipping a home and need a $50,000 loan and the appraised value of the home after it’s repaired is $100,000, the LTV ratio is 50%. This shows that if you default on your loan, the hard money lender can sell the property to repay the loan.

What Is a Hard Money Lender?

When you’re applying for a mortgage loan, you’ll typically be working with a bank or a mortgage lending company. Because mortgages come from licensed lenders, you have to meet certain criteria in order to qualify for a mortgage. This generally includes falling into a particular range in terms of credit score and debt-to-income ratio. Your financial standing may also have an impact on the quality of loans you’re able to secure.

While hard money lenders need to be licensed in most cases as well, hard money loans are issued by private lenders rather than corporations. These private lenders may not put as much stock in your credit score or your debt-to-income ratio, which can make it easier to secure a loan. Because hard money loans are often used for flipping houses, hard money lenders may be more understanding of the varying financial circumstances of real estate investors.

There are some things to consider before you apply for a hard money loan, but it may be a good option if you’ve had difficulty securing a traditional loan.

What Are Hard Money Loans Used For?

In most cases, hard money loans are used as a replacement for traditional mortgage loans, but it’s more complicated than that. Many people who use hard money loans use them as a way to secure funding to flip homes. While mortgages aren’t especially difficult to secure when you’re buying your first home or buying a home to live in, that can all change if you’re investing in real estate.

Residential hard money loans are a common way for people to invest in real estate after they’ve tested the waters. If you’re having trouble getting a mortgage because you recently flipped a home, you may be able to get a hard money loan instead.

Another thing to consider about hard money loans is that they come with different terms than traditional mortgages. Mortgages are typically spread out over a 30-year period and require a certain downpayment, while hard money loans may offer more flexible terms. Because of this, hard money loans can also be a good option if the terms of a mortgage don’t work for you.

Pros and Cons of Hard Money Loans

So, what is hard money good for? It may be difficult to understand when these loans would be preferable to a mortgage, which gives you plenty of time to pay off your loan with low interest rates. Here’s a complete breakdown of some of the pros and cons of hard money loans to help you decide whether a hard money loan or mortgage is right for you.

Pros of Hard Money Loans

• Fast closing times: Quicker closing times are one of the biggest benefits of hard money loans. While it may not be a big deal if you’re simply buying your first home, the lengthy process of securing a mortgage can make it a difficult option for real estate investors. Hard money loans offer much quicker closing times, so you can move on to your next investment as soon as possible and maximize your bottom line.
• Flexible terms: Unlike traditional mortgages, hard money loans also offer very flexible terms. The terms of these loans are determined on a case-by-case basis, which means there’s no one-size-fits-all solution. You can customize hard money loans to make sure they fit your needs, while mortgages are a bit more cut and dried.
• Easier borrowing: When you apply for a traditional mortgage, you have to pre-qualify for a loan before you can even start shopping for a home. The amount you pre-qualify for determines how much you’re able to spend on a home. With hard money loans, you can get a loan for the amount you need based on the value of the property you’re investing in. If you’re borrowing against your own property, your property value will determine how much money you’re able to borrow.
• Easier to secure: Securing a hard money loan may be easier for some investors. Securing a traditional loan requires a certain credit score and debt-to-income ratio, but hard money lenders don’t put as much stock in these numbers. If you’re having a difficult time securing a mortgage, hard money loans may be a suitable alternative.

Cons of Hard Money Loans

While there are a lot of upsides to hard money loans,  there are also some drawbacks to consider before you take out a loan. Weighing the pros and cons is an important step in deciding what type of loan is best for your financial situation.

• High interest rates: Traditional mortgages generally come with very low interest rates, which is one of the biggest benefits of securing a traditional loan. Hard money loans, on the other hand, have high interest rates that make them a less desirable option for some investors.
• Larger down payment: If you’ve had a tough time getting money together for a down payment on a house, that’s not going to get any better with hard money loans. Mortgages offer options for people who can only make a down payment for a small percentage of a home’s value, but hard money loans typically require a larger down payment that may be as high as 30%. Because of this, hard money loans aren’t always an option.
• Short repayment period: Because hard money lenders want to make money from the loans they’re providing, they don’t typically offer long-term loans. The value of a property can change too much over a 30-year period, and private investors simply aren’t willing to take on that risk in many instances. With a mortgage, you can spread payments out over a 30-year period to make buying a house more affordable.

The Bottom Line: What Is Hard Money?

While a traditional mortgage is a good idea if you’re buying your first home or buying a home to live in, hard money loans may be a better option for real estate investors. Hard money loans offer quicker closing times and more flexible terms as long as you can afford higher interest rates and larger down payments. It’s important to weigh the pros and cons before making a decision.

At Source Capital, we understand that everyone has different needs when it comes to loans. We work hard to offer a wide range of loan options, so you don’t have to work with another private investment firm. Get in touch with Source Capital to learn more about our equity and direct lending solutions.