Getting into the house-flipping business can be extremely lucrative, but it can also be difficult if you do not have any cash to use to buy your first property. If you are eager to get started in this type of business, you may want to consider using a hard money loan to get you going. Hard money loans are ideal for this purpose, and here are three things you may wonder about them.
What Is A Hard Money Loan?
A hard money loan is not the type of loan you can walk into a bank to get. Instead, these loans are issued by private investors. They typically have relatively high interest rates, and they are considered short-term loans. They are risky in nature to the investors that lend the money, but they are perfect for people who have bad credit or who are preparing to take on a risky type of job, such as flipping a house.
What Are The Terms Of Hard Money Loans?
Most of the time, a hard money loan is issued for a one-year period. During this time, you will have to make monthly interest payments on the money you borrow. At the end of the one-year term, you will have to pay back the entire loan amount plus any additional interest that is due.
You can expect to pay an interest rate that is between 10% to 18% for the loan, and you may be required to pay points on the loan.
How Much Can You Borrow?
It's also important to know that you will not be able to borrow 100% of the value of the house. In fact, most hard money loans are issued for only around 70% of the value of the house, and this refers to the value after repairs are made.
For example, if you want to buy a house for $50,000 and plan on spending $40,000 to repair the house, the lender will want to know what the value of the house will be when you are finished. If you expect the house to be worth $120,000, the lender might agree to loan you $84,000 (which is 70% of $120,000). You will need $90,000 total to buy the house and make the repairs, so you may be a little short on cash. You will either need to come up with the difference, or you will need to spend less remodeling the home.
If you are interested in getting started in this business, talk to a hard money lender to find out more about getting approved for a loan.