Renovating a property can help you increase its resale value significantly, making it much more appealing for buyers looking to move into a turnkey home.
But what if you’re planning to renovate a project and don’t have the cash to spend upfront? In this case, you’ll need to look into financing—and traditional options aren’t usually best here.
If you need faster access to funds or you don’t meet the strict requirements for taking out a bank loan, you’ll want to look into hard money lending. This article discusses everything you should know about financing your property renovation with this type of lending.
What is Hard Money Lending?
Hard money lending is a loan offering from private lenders, not traditional banks. Instead of looking at your income or credit score, hard money lenders, like the experts at Hard Money Lenders Arizona, decide on your loan eligibility by looking at the value of the property you’re renovating.
Because they take on more risk, hard money lenders usually charge higher interest rates and offer shorter loan terms, typically ranging from 6 months to a few years.
With that in mind, this type of financing is good for renovations because you can get funded quickly and complete the project without waiting for approval from a bank. Plus, you’ll be able to pay the loan back quickly, as soon as the renovation is complete, when you sell the property for a profit or refinance with a conventional mortgage.
When Should You Use a Hard Money Loan for Renovations?
It’s a good idea to use hard money lending for renovations if you’re working on a property that needs substantial repairs before it can qualify for traditional financing.
Banks don’t approve mortgages for properties that are uninhabitable or need structural work. So you might need a hard money loan so you can buy the property, then make improvements and increase its value before you refinance or sell it.
If you’re renovating a property you plan to flip, hard money loans are a useful financing option because they let you close deals quickly. If you’re trying to buy in a competitive market, spending time trying to secure a traditional mortgage could take too long, causing you to lose the deal. A hard money loan gives you that all-important speed and flexibility, so you can make snap decisions when you need to.
How Do You Qualify for a Hard Money Loan?
Since hard money lenders focus on the property’s value, the way you qualify for these loans is different.
A lender will typically look at your property’s after-repair value (ARV) when they’re deciding how much they’re willing to lend. Keep in mind that most lenders offer up to 70-75% of the property’s ARV, so you’ll need to cover the rest with your own funds.
Your lender will want to know how you plan to pay back the loan, so you’ll need to have a clear exit plan in place when you’re applying for a hard money loan.
Takeaway
Not all hard money lenders have the same terms, so make sure you compare your options before you settle on one.
You’ll want to look for a lender with a good reputation, offering transparent loan terms, so you can safely finance your renovation project with no unnecessary stress.
