Home buyers with variable income often wonder if they can qualify for a mortgage loan…
Real estate investors in California often need to borrow money in a hurry. As a result, they tend to shy away from traditional mortgage loans, which can take weeks to close in some cases.
Many investors end up using hard money loans when buying investment properties in California. In this article, we’ll explain how these specialty loans work, and the advantages they can offer for borrowers.
What Is a Hard Money Loan?
A hard money loan is a type of short-term loan secured by real estate. Real estate investors use these loans as an alternative to a traditional mortgage. They can be used to fund the purchase and renovation of properties, including rental and investment homes.
The “hard” part of the name comes from the fact that these loans are secured by the value of a hard asset, such as real estate.
Traditional banks, credit unions, and mortgage companies rarely offer hard money loans, due to the higher level of risk. Instead, they’re typically provided by private individuals or companies.
California real estate investors use hard money loans for two primary reasons:
- They cannot qualify for a traditional mortgage loan due to income or credit-related reasons.
- They need to close on a property quickly and don’t have time for the longer approval process with a traditional mortgage.
Hard money loans typically cost more than a traditional mortgage, due to having higher interest rates and fees. They also have shorter loan terms, ranging from a few months to a few years. The lender may also require a larger down payment, when compared to a conventional mortgage loan.
But for a lot of investors, the advantages offered by a hard money loan outweigh the downsides. So let’s shift gears and look at the benefits of using a hard money loan to buy investment properties in California.
Benefits for Real Estate Investors
Hard money loans can offer a number of benefits for real estate investors in California. Here are some of the biggest advantages:
- Speed: Hard money loans can be approved and funded more quickly than traditional mortgages, making them a good option for investors who need to close on a property quickly.
- Flexibility: Hard money loans tend to have more flexible qualification requirements for borrowers. For instance, borrowers with low credit scores can often qualify for a hard money loan, even if they’ve been turned down by a traditional lender.
- No prepayment penalties: Many hard money loans do not have prepayment penalties. This means the borrower could pay off the loan early without incurring additional fees. This can be useful for investors who expect to sell the property or refinance the loan within a relatively short period of time.
- Greater control: Because hard money loans typically have a shorter repayment term than traditional mortgages, borrowers may have more control over the property and be able to make changes more quickly.
Like other types of loans, hard money loans can vary in terms of their specific features and requirements. So the benefits listed above might not apply to every borrowing scenario. These are just some of the most common reasons why investors use hard money loans to buy investment properties in California.
Bad Credit Acceptable in Many Cases
Real estate investors with bad credit can sometimes qualify for hard money loans. That’s because the lender qualifies the property being purchased, rather than the borrower.
In some cases, these loans function like a bad credit home equity loan, allowing borrowers to use the equity of one property to purchase another. Hard money, equity-based loans can be used for a variety of purposes, such as flipping houses or new construction. They’re a good option for borrowers with past credit problems who want to achieve their investment goals.
Banks and credit unions, on the other hand, will scrutinize a borrower’s credit score to assess their creditworthiness. This is why investors with past credit issues often have trouble qualifying through traditional mortgage lenders.
Credit scores are based on information from a borrower’s credit report. These reports include payment history, outstanding debts, and credit history length.
- A high credit score indicates to lenders that a borrower is likely to make timely payments. This can make it easier to qualify for a loan.
- However, a low credit score may suggest the opposite, indicating a higher level of risk to the lender.
California real estate investors with poor credit might struggle to obtain a mortgage loan through traditional lenders. In those cases, they might need to consider alternative financing options for buying investment properties, such as a hard money loan.
Need financing? Located in the Bay Area, Bridgepoint Funding serves buyers and investors all across the Golden State. We provide hard money loans in addition to traditional mortgage options. Please contact us if you have financing questions or would like to apply for a loan.