As a homeowner, there may come a point when you need money for repairs and/or renovations.
While there are many traditional options available to you — such as credit cards and bank loans — a hard money loan for renovation may also be on your radar.
Hard money loans are short-term bridge loans that provide financial assistance until other forms of financing come through.
Let’s look at how to take advantage and use a hard money loan for renovation.
Submit your hard money scenario.What’s in this article?
What are hard money loans?
These loans are common in the real estate industry, with both companies and private individuals providing funds to homeowners.
Keep the following facts in mind:
- Traditional financial institutions, such as banks and credit unions, don’t provide hard money loans.
- Hard money loans don’t require as much paperwork as bank loans, thus allowing you to more quickly secure funds.
- Hard money loan interest rates tend to be higher than for standard loans.
Now that you understand the basics, let’s answer the question at hand: can you use a hard money loan to renovate your primary residence?
Even though these loans are generally associated with real estate investing, such as flipping homes, you can use a hard money loan to renovate your primary dwelling.
It’s also an option when buying a home, such as if you don’t qualify for a conventional mortgage through a bank.
When to Use a Hard Money Loan to Renovate Your Home
Hard money lenders are not subject to the same rules and regulations as conventional lenders. So, nothing is stopping you from securing a hard money renovation loan for your primary residence.
As long as you find a lender that will work with you and you’re comfortable with the terms and conditions, you can proceed.
But the question remains: should you use a hard money loan to renovate your primary residence?
Let’s break down some of the benefits of doing so.
1. Fast and Flexible
Just the same as most real estate investors, you may be seeking a fast and flexible loan so that you can immediately start on your renovation project. Hard money loans generally close within three to five business days. This is in contrast to bank loans that can take several weeks or longer to fund.
2. Lenders are Familiar With Home Renovation Financing
Hard money lenders work primarily with real estate investors. They know the ins and outs of the renovation process and the costs associated with it. This makes it easier to not only secure a loan but to work with the lender as you move through your renovation — such as when seeking the release of funds at different stages of the project.
3. Bad Credit Isn’t a Bad Thing
Nobody wants bad credit, but it’s not a deal-breaker for hard money lenders. They’re more worried about the value of the collateral property than they are about your credit rating and financial history.
However, just the same as banks, hard money lenders protect themselves by charging consumers with bad credit higher fees and interest rates. It never hurts to take steps to boost your credit score before applying for a hard money loan.
Hard Money Renovation Loan Alternatives
You now know that you can use a hard money loan to renovate your primary residence. But if you decide that it’s not the right choice, it doesn’t mean you’re out of luck. There are many other ways to fund your project, including but not limited to:
- Personal loan: As an unsecured loan, you’re not required to put up your home as collateral. With the bank taking on a bigger risk, expect to pay a higher interest rate.
- Home equity loan or home equity line of credit: A home equity loan allows you to tap into the equity in your home to fund your renovation project. Since your home is used as collateral, interest rates are typically lower than personal loans. A home equity line of credit (HELOC) is similar, with the main difference being that you only withdraw money when you need it.
- Credit cards: A credit card is a fast and simple way to renovate your primary residence. The primary drawbacks are the interest rate and the (potential) inability to borrow as much money when compared to a bank loan.
- Cash savings: This is one of the best ways to pay for home renovations, as you’re not involving a hard money lender or traditional financial institution. Instead, you’re in total control of the financial side of your project. The disadvantage is that you’re eating into your savings, which may put you at financial risk in the future.
Even if you’re sold on the fact that a hard money loan is the right way to fund your renovation, you must still strongly consider these other options. Doing so will give you the confidence to move forward.
Get a hard money loan for your renovation project.Hard Money Loan Frequently Asked Questions (FAQs)
Hard money is similar to a bridge loan in that it’s a short-term loan secured by a property. Both can be used to cover the initial cost of a home purchase or renovation while the owner seeks more permanent financing. That being said, not all bridge loan lenders are hard money lenders. Bridge loans are offered by regular banks and credit unions, usually to allow customers to buy a home before selling their current one.
It’s best to build a personal relationship with a lender so that you know that they are legitimate and what criteria they can approve. You can be connected with a pre-screened hard money lender here.
Hard money loans typically charge higher upfront “points” than traditional loans. This is because it’s a short-term loan where little money is made over time from the interest. Expect to pay multiple percentage points upfront. There are also other standard fees like underwriting, and potentially title and escrow fees.
Most hard money lenders will want to see 60-80% of the home’s value remaining after the loan is issued. For instance, a $400,000 home should have a final loan balance, including all loans, of $240,000 to $320,000. If you owe $200,000 on the existing loan in this example, you could potentially get between $40,000 and $120,000, less closing costs.
Answer these questions by conducting your research online, while also connecting with reputable hard money lenders that are willing to provide additional guidance.
Find your hard money renovation lender
It may not be your first choice, but there are benefits of using a hard money loan to renovate your primary residence. Especially if you can’t qualify for a loan from a traditional institution.
With the right information on hand, you can determine how to best secure funds for your upcoming renovation project. You may find that a hard money loan for renovation makes the most sense.
Let us connect you with the right hard money lender.Our advise is based on experience in the mortgage industry and we are dedicated to helping you achieve your goal of owning a home. We may receive compensation from partner banks when you view mortgage rates listed on our website.
