Real estate investors and property developers often use hard money loans to finance their projects. Because this loan is secured by the property that is being purchased or renovated, it’s easier to obtain than a traditional mortgage. Fix and flip loans are suitable for beginners as well as experienced investors.
How Difficult Is It to Get a Hard Money Loan?
Hard money lenders take on less risk than mortgage lenders because the loan is secured by the property and gets repaid within two years or less. For this reason, getting a fix and flip or new construction loan is much easier than getting a traditional mortgage. A property investor’s funding request usually gets approved within a few days, so there are no delays.
When determining whether to offer someone a loan, hard money lenders consider several factors. They look at the investor’s credit score, their real estate experience, and the property being purchased. Because the loan is backed by the house or apartment building, lenders often ask for a home appraisal.
Your Credit Score
The average credit score in the US is between 680 and 720. People who use their resources responsibly and have never had a credit-related issue often have a score of 750 or higher. To obtain a traditional mortgage, most lenders require a score of at least 620. Hard money lenders are more lenient, and they might accept borrowers with credit scores as low as 580.
If you’ve had trouble obtaining a loan in the past, request a free credit report from a company like Equifax. Check that the information is accurate, and determine what you can do to improve your score. Always pay your bills and loan repayments on time. Avoid maxing out your credit cards. Your score will improve quickly if you use 30% or less of your available balance.
Your Real Estate Experience
Hard money lenders also consider whether you already have some real estate experience. New investors can get a loan, but they might not get the best interest rates because they are considered riskier than people who have already completed several successful fix and flip deals. Beginners might also receive less money.
During the application process, provide details about your previous real estate purchases. If you’re hoping to flip or develop many properties in the next few years, stick to the same lender. Over time, you build up a relationship with them, and you become a trusted partner. As a result, you benefit from the best interest rates and most favorable loan terms.
The Property Being Purchased
Fix and flip loans are backed by the house or apartment that is being purchased. If you don’t repay the loan, the lender can foreclose and take ownership of your property, then sell it to recuperate the money. Before you can get a loan, the hard money lender will ask you for an independent appraisal. They might not provide you with financing if they believe that your asset isn’t worth what you’re paying for it.
How Much Does a Loan Cost?
At the moment, the average mortgage rate is between 6 and 7%. Borrowers often take twenty or even thirty years to pay off their debt. During this time, they pay tens of thousands in interest. A fix and flip loan has an interest rate of at least 10%, but it is a short-term loan, so investors actually pay much less than homeowners. At Turning Point Lending, we usually offer loan terms of five to 18 months.
If you’re borrowing $100,000 at an interest rate of 10%, you pay $10,000 per year. Since some property deals are completed within six months, you might not spend more than $5,000. If you make $20,000 from your deal, you’re left with a $15,000 profit.
Do I Need a Down Payment?
Some hard money lenders don’t ask for a down payment, but their interest rates are often extremely high. We offer several kinds of loans, and they all have different requirements. If you’re participating in our 5-Month Disposition Program or the Traditional Program, you need to provide a down payment of 10%. If you’re getting a Deferred Interest loan, you have to pay 20% upfront.
However, it’s important to remember that we don’t just cover the price of the property. We also help you with the renovation costs. Most of our loan programs offer 100% financing for the rehab of your property. We keep this money in a reserve fund, and you can request a withdrawal whenever you need to pay for materials or contractors.
How to Gain Access to a Down Payment
Saving large amounts of money might be a challenge for new investors. Unlike mortgage providers, hard money lenders don’t ask where you obtained the money for your down payment. If you’ve found a great property but you don’t yet have the funds for the down payment, you can get a personal loan from another source. Although this increases your risk, it speeds up the process and lowers the barrier to entry.
Why Use a Fix and Flip Loan Instead of a Traditional Mortgage?
The traditional mortgages available at banks and large financial institutions are often quite rigid. If you want to pay off your debt early, there might be a penalty. There are strict regulations, and it takes several weeks before you obtain the money you need for your property purchase. A hard money loan is flexible and easy to obtain, so it’s a better option for short-term investors.
Good lenders understand the unique requirements of people who flip or develop residential properties. The loans offered by institutions like Turning Point Lending are tailored to short-term investors’ needs. They are approved quickly, so deals can be completed without delay. Because lenders know that real estate deals can be unpredictable, the terms are often flexible.
Is a Loan Better than an Outright Purchase?
Sometimes, people ask us whether they should take out a loan if they already have enough money to purchase a property outright. Buying a house or apartment with cash is cheaper than using a loan, but it uses up a lot of resources. Investors can increase their profits by getting a loan and purchasing more than one property at a time.
If you buy and renovate a single home for $200,000 and sell it for $250,000, you make $50,000. However, if you can use financing and buy four similar properties, you can make $200,000. Even if you have to spend $50,000 on loans, you still make a profit. This is why so many property investors use financing when fixing and flipping homes.
What Are the Advantages of Using Turning Point Lending?
We have been helping investors fund their real estate purchases for several years. Before becoming hard money lenders, our founders rehabbed and flipped properties, so they understand the needs of real estate investors. We have developed several unique lending programs that allow investors to complete property deals at their own speed. Our mission is to help our partners make their property businesses more profitable and easier to manage.
A hard money loan is suitable for investors looking to flip a property or developers constructing new homes. It’s easier to obtain than a traditional mortgage or loan because the lender’s risk is low. Get in touch with us at Turning Point Lending to find out more about our fix and flip loans and new construction loans. We provide investors looking to renovate or construct residential properties with up to $2 million per project.