FAQ Real Estate Investors: Is a Hard Money Loan Considered Cash?

Buying your dream house isn’t easy. It may be one of the most expensive investments you’ll make in your life. There are so many aspects you have to consider before settling on the perfect one. It’s important to check which school district, shopping center, and hospital are the closest. But even before you can sign the papers, you need to make financial decisions on the property. 

To proceed with confidence, you need to know what your options are.

What are your choices?

Some lucky home buyers have the opportunity to purchase real estate through an all-cash deal. There are no loans or financing contingencies. The purchase agreement document is very straightforward. Payment is completed through cashier’s check or the transfer of funds. This could be done before or at the time of closing.

But don’t miss out on buying the house of your dreams in Dallas just because you do not have sufficient funds. Traditional sources include acquiring a mortgage loan from a community bank or local credit union. Other alternates are readily available, such as crowdfunding, HELOC (home equity line of credit), FHA 203K loans, and private money lenders. One option that is gaining considerable attention these days are HMLs (hard money loans).   

Hard Money Loans

HMLs are loans for real estate business investment purposes. They are ideal for investors who have experience in buying a property with the intent of renovating it and selling it to make a quick profit. Such short term loans carry high interest rates.

Unlike other mortgages, they are tied to the value of the property that is being purchased. Since these loans have a relatively easy qualification process, buyers can close swiftly. For many, this is enough to justify the high costs associated with the loan.

Is it the same as cash?

Hard money loans are not solely cash loans. If a seller demands cash-only, they may not agree to an HML. Cash has the power to guarantee a close. There is no risk that the financing will fall through.

With a hard money loan, there is a possibility of hiccups later on. Just like any other loan, they are subject to approval, inspection, appraisal, etc. Any of these reasons may cause an application to be denied while in escrow. 

However, there is always room for negotiation. And though not entirely the same as cash, an HML can help settle a deal. According to nerdwallet.com, the average closing time for purchase and refinancing loans combined is about 43 days. Because HMLs have shorter processing times than traditional loans, they allow people to respond to investment opportunities quickly. In most situations, hard money loans can be funded within a week, states Retipster.com. 

So, in a way, HML can be considered as similar to cash. Hard money loans and all-cash offers are both fast and flexible alternatives when purchasing real estate.

Who should use hard money loans?

HMLs are great financing tools for investors. They are typically extended to those who have experience in buying and selling a property. With the right plan, you have a chance to make a decent profit. Ideally, they are perfect for:

  • Fixes and flips
  • Property developments

In both cases, hard money lenders will want to see where you intend to use the funds. They may even offer advice on renovations that create the most return to the value of the property. Consider home renovations that have the highest ROI.

Pros of Hard Money Loans

  1. Loans are quickly approved. There is less paperwork involved, so processing times are shorter. The following documents will be needed: 
  • Your executed contract
  • Your repair estimate
  • The appraisal
  • Your insurance binder
  • Title company docs
  1. There is less red tape. Since the loan is collateral-oriented and is secured against the property, there is less focus on the borrower’s credit than with a conventional mortgage lender.
  2. There is more flexibility. Traditional money lenders often don’t permit applicants to utilize borrowed funds for down payments. HML policies are flexible and do not impose such restrictions.
  3. Funds are released quickly. HMLs are short term loans. This allows projects to start and finish faster.
  4. You need to pay only a fraction of the property’s price as a down payment. Hard money lenders usually abide by a 60% to 80% loan-to-value ratio (LTV). This leaves a considerable amount of capital open for other investment opportunities. 

Cons of Hard Money Loans

  1. Lenders charge a high-interest rate. This is a high-investment project, and lenders know that. 
  2. Loans are for a short period of time. Hard money loans tend to be for 6 to 24 months. If the work is not completed on time, or the property does not sell, there may be additional charges.

Pros of All-Cash Offers 

  1. There are no mortgages or interest involved. Funds are appropriated from the buyer’s savings accounts, retirement funds, checking accounts, cash from investments, etc. It saves money because there are no loans to pay off at an extra cost.
  2. Deals close faster. Since there is no need for inspections or appraisals, deals can proceed at a faster pace. There is less paperwork.

Cons of All-Cash Offers

A substantial amount of funds will be invested at once. If borrowers take a loan against a life insurance policy or equity on other properties, they will still have to make payments until the property is sold.

It’s a wrap

HMLs are not the same as cash. But they carry much of the same weight. This is your chance to make the most out of the flourishing real estate market. Remember to have a well-thought-out exit strategy. 

Consider building a long-term relationship with a reliable hard money lender. This enables you to continue making money into the future.

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