If you’re looking at your mortgage options and wondering whether you can use a hard money loan to buy a house, you need to know that it’s possible – but it’s only advisable in certain situations. Here’s what you need to know.

Can You Use a Hard Money Loan to Buy a House?

It’s possible to buy a house with a hard money loan, but due to the way that these loans are structured, they’re typically best for real estate investors – not usually for people who are looking to buy a personal home to live in.

When is it Smart to Use a Hard Money Loan to Buy a House?

If you’re buying an investment property, it can be smart to use a hard money loan. That’s because these loans are typically given based on the value of the property – not on your personal creditworthiness.

Related: The easy way to buy a fixer-upper and flip it

What Do Most People Use Hard Money Loans For?

Hard money loans are most commonly used for:

  • Flipping a house. This occurs when an investor buys a property that needs work, fixes it and gets it ready for a buyer, then sells it. A hard money loan can fund the after-repaired value (ARV) of a house, which means you can borrow more than the house is worth so you have enough cash on-hand to make necessary repairs. Then, you can sell the house at a profit.
  • Buying an investment property. This is when an investor buys a property that they plan to rent out. The rental income can help to make the loan payments, and the long-term goal is to sell the property at a profit.
  • Buying a commercial property. This could be anything from an office building to a warehouse or retail space. Commercial properties are typically larger than residential properties, so a hard money loan can be helpful in order to get the necessary funding quickly.

How Does a Hard Money Loan Work?

Hard money loans are typically given by private investors or companies, not by banks. The terms are shorter than conventional loans – usually around one to five years – and the interest rates are higher, since these loans are considered to be higher-risk.

The loan amount is typically based on the value of the property (and often even the value of the property after it’s repaired – not what it’s listed for, which means you can borrow more than the asking price). Loan amounts don’t normally hinge on your personal creditworthiness, though your credit does matter to an extent. That’s one reason hard money loans are often used by investors; another is that investors can get funding very quickly so they don’t miss out on great deals. Conventional loans take a comparatively long time to get approved.

Related: 7 essential upgrades to make when you flip a property

How is a Hard Money Loan Different From a Conventional Loan?

A conventional loan comes from a bank, and the terms are usually more favorable – lower interest rates and longer repayment periods – because your creditworthiness is taken into account when you’re approved for the loan.

Hard money loans come from private investors or companies, and they’re given based on the value of the property – not your personal credit score. The repayment terms are shorter and the interest rates are higher, which makes them more expensive in the long run – but they’re easier to qualify for if you don’t have great credit.

Related: Hard money loans, explained

How Do You Know if a Hard Money Loan is Right for You?

If you’re looking at your mortgage options and trying to decide whether or not a hard money loan is right for you, here are some things to keep in mind:

  • Hard money loans are typically best for investors, not people buying a personal residence.
  • Hard money loans are given based on the value of the property, not your personal creditworthiness.
  • The terms are shorter and the interest rates are higher than with a conventional loan.
  • You can get funding very quickly with a hard money loan.

If you’re looking for a quick and easy way to finance an investment property, a hard money loan might be the right choice for you.

Do You Need a Hard Money Loan?

Paces Funding is the top hard money lender in Georgia, North Carolina, South Carolina and Tennessee. Apply for a hard money loan here or click through our site to find out how we can help you now!