Hard Money Construction Loans: What You Need to Know

Hard money construction loans are a fast and flexible way to secure lending backed by real estate properties. If you are a house flipper or real estate investor and need financing for a deal, a hard money loan might be a great option to explore, but if you are a homeowner looking to renovate your home, a RenoFi loan may make more sense.

RenoFi does not offer hard money construction loans and they are not typically offered through traditional financial institutions either. This lending choice is available through individual investors and private lenders. 

Let’s explore the ins and outs of hard money construction loans. Since these loans are typically for real estate flippers and investors, we will also offer an alternative funding option with RenoFi if you have upcoming renovations you need to plan for. 

Hard Money Construction Loans – A Brief Overview

Hard money construction loans are used for short-term financing and are always secured by an asset (such as real estate). They are also known as bridge or asset-based loans. They have a short repayment term, usually around or less than a year.

For this reason, they are often pursued by investors, house flippers, or developers who buy houses intending to fix them up and sell them swiftly. A hard money loan is also easier to qualify than a traditional loan since it focuses more on the projected value of the finished property than your financial profile and credit score. 

How Do Hard Money Construction Loans Work?

Hard money construction loans work differently than traditional mortgages. They often have a straightforward application process, with fewer hoops to jump through and a more streamlined approval process.

These loans can also allow seasoned real estate professionals to work on several projects simultaneously. They can use a hard money loan for one project while their capital is engaged in another, allowing continuous work without waiting for traditional financing.

Hard Money Loans vs Traditional Mortgages

Hard money loans are different from traditional mortgages for various reasons:

Application Process

Applying for a hard money loan involves less paperwork than a typical mortgage. The closing on hard money loans is also swift, making them the ideal way to quickly access funds and build new properties. But if it’s your first time securing a hard money loan, you may have difficulty getting approved and need to provide additional information than a veteran investor. However, it is still faster to secure than a traditional mortgage.

Interest Rate and Down Payment

Hard money loans typically have higher interest rates than conventional mortgages. A traditional loan also typically has a small minimum down payment of 3%, whereas hard money loans have much higher rates. Depending on your credit score and financial profile, you can expect about 10% to 30% or even more as a down payment for hard money loans.

Benefits of Hard Money Construction Loans

Hard money construction loans entail several advantages for the borrower:

Greater Flexibility

The most prominent feature of hard money construction loans is their inherent flexibility. Lenders have lenient regulations for negotiating loan terms and repayment schedules. They may also offer relaxations regarding interest rates and loan-to-value (LTV) ratios.

Rapid Access to Funds

Hard money loans offer a swift turnaround of funds to work on properties requiring immediate action. The deal is closed quickly, and the borrower is given access to the funds within a couple of days or weeks of application.

Asset-Based Funding

Hard money construction loans focus more on the estimated market value of the property rather than your finances. These loans open up opportunities to finance home purchases or renovations even if you have a weak credit score or irregular income.

RenoFi also uses the home value but in a different way. For example, in contrast to the traditional loans that consider the current property value, RenoFi loans consider the project’s after-renovation value to offer finance. For example, suppose your home is currently valued at $500,000 with an outstanding mortgage balance of $400,000. You expect the after-renovation value of the project to be around $640,000. 

A standard loan, with its 90% LTV, allows you to borrow $0 to fund the project. However, with RenoFi, you can use the after-renovation value to finance the project and effectively get up to $176,000.

Drawbacks of Hard Money Construction Loans

Now it is time to look at some of the drawbacks you may encounter when choosing these construction loans:

Short Repayment Terms

Hard money construction loans usually have a short repayment period, ranging from six months to five years. This, in turn, leads to considerably high monthly payments, which are quite challenging to manage, especially if the cost overruns during the project’s duration.

High Costs

While hard money loans offer ample flexibility, they generally come at the price of high interest rates. In addition, this financing option may require the borrower to pay additional charges like origination, processing, and closing fees that significantly boost the total loan cost.

Risk of Foreclosure

While the asset-based nature of these loans makes it easier to qualify for them, it also increases the risk of defaulting. Since the loan is secured using the property under construction, the borrower can lose ownership if they are unable to repay the loan.

Conclusion

Hard money construction loans offer an attractive alternative to traditional mortgages with a quick turnaround. This financing strategy helps real estate investors and owners rapidly construct new properties from scratch or renovate them to sell later at high prices.

When looking for a lender, find a reputable financial institute with a trustworthy track record in the industry. RenoFi, for example, focuses on renovations rather than simple remodeling projects and people who want to own their homes long-term rather than flippers or investors who renovate just to flip the house and sell it. 

RenoFi loans provide an apt way to finance home renovation projects. Focusing on the after-renovation value, RenoFi loans allow you to borrow 11 times more than traditional loans without giving up your low mortgage rate or increasing your monthly payments.

Browse through RenoFi’s other borrowing options and kickstart your home building and renovation journey the right way.