5 Reasons for a Hard Money HELOC Loan

Many investors and home owners do not realize that there is such a thing as a hard money home equity line of credit or HELOC. This type of loan is available for both residential and commercial properties in California at this time. Certain lenders have been closing these loans in California for the past few years. Some self-employed real estate investors in particular find these types of loans valuable.

A hard money HELOC loan is similar to a HELOC on your personal residence. A HELOC is a second mortgage that is taken out with the equity in your property. This is a line of credit that is similar to a credit card, but your equity serves as the credit line. A HELOC has a variable interest rate that can be very low at first for your own home but can rise over time. The rate is often tied to the LIBOR or prime rate.

A hard money HELOC loan, like a regular HELOC loan, can be paid down at any time. You only need to pay interest on the amount that you are using right now. Interest is determined based upon how much of the credit line that you are using and not your credit limit. Real estate investors like this aspect of the hard money HELOC loan because they are not getting the full amount of cash that they qualify for when the loan closes. This can greatly reduce the amount of interest paid on the loan.

Another reason to use this loan is for the self-employed borrower. The limited amount of underwriting on a HELOC hard money loan means that your financials are not as important with this type of loan. With a regular HELOC, you need to qualify for the loan based upon your income, debt and personal credit. But these qualifications can be more challenging for the self-employed borrower, especially income. Many self-employed borrowers, such as real estate investors, have irregular income and do not have pay stubs that are normally used to qualify people for mortgages.

The major thing that is used to qualify people who use this type of loan is the equity that is in the property and their overall value. With fewer underwriting requirements, it is possible for a loan to get funded within 14 days instead of many weeks or months that is common with a loan that must be fully underwritten.

Because the requirements for underwriting are less, it does mean that the costs of the loan will be greater. A regular bank or lender HELOC can have zero points and have an interest rate as low as 5% in the current market of 2018. But a hard money HELOC will often cost your one to four points up front and an interest rate of at least 10%.

For many real estate investors who use this type of loan, the higher cost is just part of doing business as a self-employed investor. Many clients have several real estate properties that are financed with private money loans, so they are often ok with the higher costs. They especially like being able to get the capital they need in a short time. It is common for real estate investment properties to get snatched up by the first person who has cash to close first. So, the faster that you get your hands on the money, the better the chance that you can get the property you want.

Hard money HELOCs can have terms that vary from 12 to 36 months and may be renewable. A full appraisal is usually required of the property to qualify for the loan. If you do not pay the loan, the lender has the right to take the property.

References

https://fctd.com/hard-money-business-purpose-home-equity-line-credit/