You have seen a house, which can have a good price in the market but after repairs only. Instead of digging into your savings, go for hard money loan. Hard money loan differ from other loans that you take because in other loans, called soft loans, guidelines and rules are written by the underwriter. But in case of hard loan, the lending companies have their own rules, which are not so restrictive as in the case of soft loans. They are also short term in nature and if you have good track record and pay regularly, you can borrow more money if needed from your hard money loan company.
The Different Types of Hard Money Loan
You find a house for about $10,000. The house needs extensive repair, but the market value of the house will be double once it's ready and repaired. So you approach a hard loan company. The company will do it's own appraisal and if they think that it has potential they will lend you 65% to 70% of the total value of the house. The best part of this hard money loan is that, this value is not the original value of the house but After Repair Value (APV)! So you will get $13,000 as your loan amount. You not only buy the house but repair it as well. This is known as APV loan.
The next type of loan in Escrows loan. In this loan type, you give details about what repairs you have to do in the house and how much it will cost and that will set up your Escrow account. The lending company will escrow your repair bills and may also pay some initial payments. That is done to make sure that the job is completed. A 3rd party company, called Title Company for a specific purpose, will hold the loan amount.
The Distribution of Money
The loan amount is not paid in full, but in draws. As you go on repairing your property, company appraisers will personally see whether the work is being going on or not. Once they are satisfied, they will release some money. This is known as draw. Most of the time, the properties in the market are in depleted condition. If the repairing bill is above $2,000, you may not get soft loans. Neither is it advisable to do it from your own pocket. That is why you should go for hard money loan, as that will cover all the needed repairs.