Use Visio Lending as an Alternative to Hard Money Loans

Real Estate Investment Strategies

Often, real estate investors use hard money loans instead of their own money, money from private investors, or a loan from a traditional lender or local bank. Hard money loans are easier to qualify for, often have a low minimum credit score requirement, do not require you to prove property cash flow, and require far less documentation than a loan from a traditional lender or local bank. Yet, there are other options, including Visio Lending. Let's take a closer look at:




What is a hard money loan?

A hard money loan is a type of mortgage loan. There is no universal agreement on why they are called “hard money” loans, so let’s discuss their common features. Hard money loans typically have short terms such as 12 to 24 months and higher fees and interest rates. Hard money loans often include both purchase financing (to fund buying a property) and construction financing (to make improvements to the property). Most hard money lenders (those that make hard money loans) focus first and foremost on the value of the real estate put up as collateral for the loan. Hard money lenders usually raise the money they lend from private investors or financing groups.

Hard money lenders also care deeply about the experience of the real estate investor and the investor’s business plan for the property. Some, maybe even most (but not all) hard money lenders these days look at the investor’s credit score and depth of credit. Although most hard money lenders are more lenient on credit than traditional mortgage lenders (for example, they may have lower minimum credit score requirements).

Another important piece to note is that hard money loans are typically used by real estate investors for business purposes, such as house flippers or investors purchasing an investment property, whether a commercial property or a residential rental property.


Hard Money Loans vs. Construction Loans vs. Renovation Loans

The term “construction loan” generally refers to a loan for ground-up construction of a new home or commercial building and includes the purchase financing for the underlying real estate. A renovation loan is the type of financing someone would need for remodeling an existing building. The main difference between a renovation loan and a hard money loan is that the renovation loan is only structured to finance renovation costs, not the purchase of a property.1-Aug-08-2023-07-40-01-4920-PM-2


Hard Money Loans vs. Bridge Loans

Bridge loans are a subset of hard money loans. The key difference is that bridge loans do not include the renovation or construction component. An example of this would be when a real estate investor finds a great deal on a piece of real estate and needs a short term loan to hold it briefly before selling it to another investor to fix and flip.


Hard Money Loans vs. Traditional Loans

Conventional mortgage financing, including loans from most local banks, has a stringent approval process that focuses heavily on a borrower's credit score, pay stubs and cash reserves. Even though hard money loans have more onerous loan terms, such as higher interest rates and sometimes prepayment penalties, such loans are much easier to qualify for than conventional mortgage loans and typically don't require tax returns or income documentation.  If you want to purchase an investment property but have poor credit or credit issues whether on personal loans or mortgage loans, you will want to consider other loan options, such as hard money loans.




How Hard Money Loans Work

Hard money loans are usually broken into two parts: the purchase of the real estate and the rehab.

The real estate purchase is relatively straightforward. The lender typically will size their loan amount to both the after-repair value, or Loan-to-Value (LTV), and the total cost of the project or Loan-to-Cost (LTC).

The application process for the purchase is similar to other types of finance. You complete an application, provide documentation and usually order an appraisal. You also are required to provide a business plan for the property and a detailed renovation timeline. Once your loan is approved, you close on the purchase, usually with you funding the down payment, and the lender funding the remainder of the purchase price and closing costs.

The rehab process is where hard money loans get interesting. You now own the property and want to begin to improve it. You need funds to buy materials and pay contractors. Most hard money loans require you to front this initial investment in materials and labor. Once you’ve completed a phase of the work consistent with your renovation project, you request from the lender something called a “construction draw.” This means that after the investor has made renovations, they can submit a request for reimbursement. In order to successfully use hard money financing, house flippers are going to need enough upfront cash reserves for initial rehab costs, including labor and materials. 


Hard money rates & fees

Why are hard money rates and fees higher? A few key reasons. First, the terms are so short that the only way the lender can cover the costs of making the investment property loan and earn a reasonable profit is by charging higher fees and a higher interest rate. Second, because hard money loans often include construction financing, they tend to be higher risk than permanent financing on already stabilized real estate. Finally, many hard money lenders have more flexible or lenient credit or underwriting requirements. For example, many local hard money lenders do not require full-blown appraisals if they are lending in their own city.  Hard money lending can be a good business, but lending money like real estate investing is subject to a variety of risks. 


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Hard Money Pros and Cons

  Hard Money Loan Pros:

  • Qualify based on property value: Unlike a traditional loan, hard money loans rely more on property value rather than personal credit history.

  • Fast closings: Often, hard money loans close in as little as a few days.

  • Quick approvals: Since personal income is not a determining factor, hard money loans offer much faster approvals.

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 Hard Money Pros and Cons

  Hard Money Loan Cons:

  • Short term financing: Real estate investors have less time to pay back their loans.

  • High rates and fees: Interest rates tend to be higher on hard money loans. They also often have higher fees.

  • Low LTVs: You're going to need a higher down payment.



Hard money loan FAQs

If you're looking for a short-term loan to quickly resell a property, a hard money loan can help finance that. However, it will come at a higher cost and it’s a good idea to plan ahead for refinancing if you intend to hold the property for rental. If you’re looking for something longer-term and steadier, Visio Lending has options for expanding your real estate portfolio of single-family rental properties.  To find the best hard money loans, we starting with local hard money lenders to see what they have to offer.


The biggest differences are the loan requirements and interest rates. A traditional mortgage will offer the lowest interest rates, yet the most stringent requirements. Hard money loans, on the other hand, have higher interest rates yet much simpler qualifications. Another big difference is the use case. Although you can use conventional financing to purchase investment properties, the properties have to be rent-ready. Traditional lenders do not finance construction projects or flip properties.


Hard money loans are ideal for real estate investors who are working on a construction or fix and flip project.  If you need more money to complete your flip project, you also can explore personal loans from a variety of unsecured consumer lenders.




Hard Money Loan Alternatives

The best alternative to a hard money lender primarily depends on the purpose of your loan. If your goal is to purchase investment properties, you can consider working with banks or traditional lenders. You can also work with a DSCR lender like Visio to obtain a loan for an investment property. If your goal is to flip properties, a hard money lender could be the right choice for you, as long as you have a solid exit strategy (see the next section for more details). Another loan option for financing a construction project is to use a cash-out refinance to pull cash out of another property. Frequently, investors will work with Visio Lending to obtain a cash-out refinance loan on a rental property and use the cash to finance another investment.


Hard Money Loan Exit Strategies

Hard money loans are short-term loans with two years typically being the longest term. Since the loan is due in full within two years, it is key to have an exit strategy to avoid paying a large lump sum. Here are some ways to repay your hard money loan, including selling the property and refinancing.

Sell the Investment Property

This is the most common exit strategy for a hard money loan. A borrower will work with a hard money lender to finance a flip, flip the property, pay back their loan, and pocket the extra cash. Though it sounds simple, flipping properties relies on careful planning and working with a licensed contractor to ensure a worthwhile ROI.

Refinance Your Hard Money Loan into Permanent Financing

In this strategy, rather than selling investment properties at the end of a flip, investors will keep them for long-term rentals. Some investors are able to use the improvements put into the house to obtain a higher loan amount and actually pull cash out of the property. Others will simply obtain more favorable loan options, including loan rates and terms. A few things to keep in mind for this strategy include:

Down Payment and Closing Costs: There are expenses in obtaining a new loan, and you will usually need a minimum down payment of 20%.

Prepayment Penalties: Some lenders have a prepayment penalty if you pay back the loan early. If your goal is to sell the property in the near future, pay close attention to the loan terms.


Hard Money Lenders vs. Visio Lending 

Visio Lending's primary focus is providing long-term financing to enable landlords to grow their rental portfolios. On the other hand, hard money lenders typically fund short-term projects such as construction, fix and flip, or rehabs. Here's a closer look at some other distinctions between Visio Lending and hard money loans:

  • Credit Score: Visio Lending requires a minimum of 680, while not all hard money lenders require a credit report.

  • Appraisals: Visio Lending requires a third-party appraisal but now all hard money lenders do. Some use a Broker Price Opinion (BPO) or other methods to determine lending value.

  • Property Condition: Visio Lending requires properties to be in c4 condition or greater, meaning we only fund rent-ready properties with no deferred maintenance. Hard money lenders finance construction and rehab projects, so they do not require move-in ready property conditions.


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