What are hard money loans used for?
Hard money loans are a valuable resource in the Detroit real estate market, offering solutions for quick funding needs and for those unable to obtain traditional loans. Here are some scenarios where hard money loans are commonly used:
1. Flipping a house: Detroit investors engaged in flipping homes benefit from hard money loans by obtaining rapid financing. This allows for quick property purchases and renovations, leading to faster sales and profits.
2. Buying an investment rental property: These loans help investors acquire and rehab rental properties. Fast access to funds ensures timely renovations and quicker rental income generation.
3. Purchasing commercial real estate: Hard money loans offer the speed and flexibility needed for acquiring commercial real estate.
4. Borrowers who can’t qualify for traditional loans: Individuals with ample home equity but poor credit can turn to hard money loans. These loans are based on the property’s value, making them accessible to those with credit challenges.
5. Homeowners facing foreclosure: Homeowners facing foreclosure can use hard money loans to refinance their debts or gain time to sell their property. This approach can help prevent foreclosure and preserve their credit rating.
How much do hard money loans cost?
Hard money loans come with higher costs compared to traditional loans due to the higher risk and expedited process. Common costs include:
- Interest rates: These can be 8% to 15% or more.
- Origination fees: Lenders often charge 1% to 5% of the loan amount.
- Closing costs: These can include various fees, such as legal and appraisal fees.
- Points: Lenders might charge upfront points, a percentage of the loan amount.
Online calculators can estimate these costs accurately.
Alternatives to working with hard money lenders
If you’re a homeowner exploring ways to leverage your home’s equity instead of using a hard money loan, consider these options:
Take out a second mortgage: A home equity loan or HELOC can offer lower interest rates and provide necessary funds more affordably than hard money loans.
Cash-out refinance: This method allows you to refinance your current property and withdraw cash to fund new investments, usually at lower interest rates.
Borrow from family or friends: Personal loans from family or friends can provide flexible repayment options and lower interest rates, making them a cost-effective choice.
Use a government-backed loan program: Government programs from the FHA, VA, or USDA can help you buy homes with reduced down payments and interest rates.
Peer-to-peer loan: These loans, through platforms like MeridianLink or Funding Circle, connect borrowers with individual investors who might offer more favorable terms.
Specialized loan programs: Look into loans specifically designed for fixer-uppers or refinancing investment properties, which can help replace an existing hard money loan.
Request a seller financing option: Some sellers may agree to finance the purchase, leading to lower closing costs and easier eligibility criteria.
How to buy before you sell
The perfect listing often appears unexpectedly, whether it’s a cozy bungalow or a modern loft downtown. For Detroit homeowners looking to buy a new home before selling your current one, HomeLight’s Buy Before You Sell (BBYS) program can simplify the process.
With the Buy Before You Sell program, you can leverage your current home’s equity to make a competitive, non-contingent offer on a new property. HomeLight can approve your equity unlock amount within 24 hours, with no upfront cost or commitment. This enables you to secure your next home and sell your existing one vacant, avoiding the inconvenience of moving twice.
Here’s how HomeLight Buy Before You Sell works:
The program charges a flat fee of 2.4% of your current home’s sale price. However, potential savings on moving costs, temporary housing, and the purchase price of your new home can make this worthwhile. Moreover, HomeLight’s BBYS fees are generally lower than the interest rates on bridge loans, which range from 9.5% to 12%.
