Banks vs. Hard Money Loans vs. Cash – What is the best option for you?

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Money lending is a vital aspect of trade and commerce and of course, investing in real estate, whether it is buying a home or leasing a commercial space. However, there are a couple of options that you can opt for and choose when it comes financing your real estate investment. This post dives into three popular options.

Hard money loans

Hard money loans are given explicitly for short-term real estate investments. The lenders are primarily private entities – or they could be a group of private investors as opposed to traditional lending channels such credit unions or banks. The term of payment for Houston hard money lending is usually 12 months. However, based on borrower and lending understanding or negotiation, the loan can be further extended to 2 to 5 years. You have to make monthly interest payments or pay a portion of the principal amount with the interest amount.

The amount of money you can borrow mainly depends on the total value of the property you are interested in buying. Moreover, you can also keep your own house as collateral (if you own a property).

Hard moneylenders care more about the value of the property they are lending for rather than the type of credit score the borrower has. But in some cases, a lender may inquire as to how healthy your credit score is.

Pros

  • A fast procedure – The lender is more concerned with the value of the property or the collateral and not much with the type of financial situation; you are in. They will approve the loan faster than banks and credit unions. They prefer not to look at your financial records, bank statements, etc. with a magnifying glass.
  • Flexibility – Unlike mortgages and bank financing, private moneylenders do not resort to a benchmark underwriting process. They tend to analyze every deal separately. The flexibility of the loan depends on your situation. It is entirely the lender’s discretion to make changes in factors like repayment schedules and whatnot.

Cons

  • Hard money loans are a bit expensive – It is easy to understand why they can be costly given that the approval process is faster and you may be given certain flexibilities. However, it is still preferable to opt for conventional financing. That is because certain types of loans, for instance, FHA loans, provide lending opportunities to individual with a less than moderate credit score. However, you will have to pay more in interest.

Bank Loans

There are a couple of options that provide 100% financing. For example, you could opt for first-time programs for homebuyers like FHA loans or Fannie Mae. However, it is essential to understand that if you don’t qualify or are eligible for specific requirements, you will not be able apply for federally backed loans. On the other hand, if you have a good credit score, you can opt for a loan through credit unions on a higher interest rate.

Pros

  • Good investor returns – 100% financing through federally backed loans or conventional financing can be advantageous if you desire to invest in real estate without putting in a lot of money. Moreover, if you have plans to use the real estate to generate income, you will be able to make more income by investing less money – giving you a boost in ROI.
  • Quick entrance – If you are looking to buy a home, getting fully financed is going to be useful if you don’t have the necessary funds available in the short term or if aren’t eligible to qualify as first homebuyer. While it is true that you can get fully financed for a home without making a considerable down payment, if you fail to save money for maintenance, taxes, emergency scenarios, and future payments after the deal is closed, it is going to hamper your capability to stay in the house.

Cons

  • The deal will come with strings attached – A disadvantage of conventional loans such as FHA loans or Fannie Mae is the fact that they come with a lot of prerequisites and restrictions. For example, in many cases, you are going to have to live in the home and not be able to rent it out for generating additional income. Moreover, you may not even be able to use the property as an investment tool. Furthermore, if you move out, you will still have to pay back the funds you owe the bank.
  • Diminishing equity – You have to factor in equity considerations too, while zero down payment is light on the bank account, it also means you don’t have any equity in the house. And that is going to make it very difficult for you to sell the house or refinance it.
  • Increased credit prerequisites and cost requirements – 100% financing via conventional borrowing is not exactly easy. You have to maintain an excellent credit score – which is above the 720 mark. Moreover, you will also bear high-interest rate payments.

Using cash to buy a home

If you have the moo-lah to buy a house, you will not have to wait to get approval from a bank; you won’t have to qualify for any requirements, etc. And that is a lot of peace of mind. It speeds up the transaction process and takes out a lot of stress from the whole deal.

Pros

  • No monthly bank payments – Owning a house comes with a lot of financial responsibilities, such as maintenance and utilities. Imagine not having to make interest and mortgage payments on the house. You could very well save that money and invest it in the stock market – a financial vessel that offers a higher potential return.
  • You have total ownership of the house – This is another remarkable advantage, it gives you a full sense of financial security, especially when you fall on hard times. For example, if you lose your job you will at least not have to worry about making mortgage payments. Moreover, because you already own the house, it cannot be foreclosed.

Cons

  • Liquidity deficit – Let’s be honest, making an upfront payment for a new house is going to diminish a lot of your liquid assets – which is mostly in the form of cash. That is why it makes sense only for those who are able to save some money for emergencies. It is not smart to make a huge payment and have a zero security cushion.
  • No leverage – For a lot of us, getting rid of debt is a big priority. However, having a leverage in real estates, such as a mortgage, can a seriously advantageous. You see, your mortgage is locked-in, and on top of that, if you manage to secure a favorable interest rate, even during inflationary periods, you will have the means of making money on your mortgage thanks to the economic effects of the inflation.

The Bottom Line

While all three of these options are viable and widely acceptable, it is crucial to be meticulous in choosing one that suits your financial situation.

For example, it won’t make sense for you to apply for a bank loan if you don’t have a good credit score. The same goes for cash, and if you don’t have enough to save for emergency scenarios, you will face a tough time maintaining your house.

However, hard money loans are an excellent opportunity, mainly because private lenders are not concerned with your financial situation other than the value of the subject property.