When securing financing for real estate projects in Connecticut, hard money loans offer an atypical solution. Whether you’re flipping homes in the Nutmeg State or investing in rental properties along the scenic coastline, knowing the ins and outs of how hard money lenders operate can be essential for your success. Unlike traditional loans, these short-term, asset-based loans provide faster funding, which can be a significant advantage in a competitive market.
Hard money loans are best for those needing quick cash without the stringent credit checks of conventional mortgages. However, the ease and speed of obtaining these loans come with higher costs and risks.
This guide will help you understand the ins and outs of hard money lending, ensuring you make informed decisions for your real estate investments in Connecticut.
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Editor’s note: This post is for educational purposes and is not intended to be construed as financial advice. HomeLight always encourages you to consult your own advisor.
What is a hard money lender?
A hard money lender provides short-term loans secured by real estate, typically used by house flippers and investors. These lenders focus on the property’s after-repair value (ARV), which is the estimated value after renovations are complete. ARV helps determine the loan amount, usually a percentage of this value, giving investors the funds needed for purchase and repairs.
Clients of hard money lenders often include rental property investors and those unable to qualify for traditional loans. The interest rates and fees for hard money loans are higher due to the increased risk, with interest rates typically ranging from 8% to 15%. If a borrower fails to repay, the lender can foreclose on the property, making these loans a serious commitment.
Additional costs can include origination fees, closing costs, and points, which are a percentage of the loan amount paid upfront.
How does a hard money loan work?
If you’re a real estate investor looking for a financing option that provides speed and flexibility, connecting with hard money lenders in Connecticut could be beneficial. Here’s a quick rundown of how hard money loans work:
- Short-term loan: These loans usually have a repayment period of 6–24 months, unlike the 15- or 30-year terms of conventional mortgages. Some lenders may extend the term up to 36 months if needed.
- Faster funding option: When you need to close a deal quickly, hard money loans can be approved within days, compared to the 30 to 50 days typical for a mortgage loan.
- Less focus on creditworthiness: Approval relies less on your credit score or income history and more on the property’s value.
- More focus on property value: These loans require collateral, such as a home, and are based on the loan-to-value ratio of the property.
- Not traditional lenders: Individual investors or private lending companies usually provide hard money loans, not traditional banks.
- Loan denial option: These loans are often used by those with poor credit who have been denied a mortgage but possess significant home equity.
- Higher interest rates: Due to higher risk, these loans have higher interest rates than traditional mortgages.
- Might require larger down payments: Borrowers may need to provide a larger down payment, sometimes up to 20%–30%, depending on the property’s value and loan specifics.
- More flexibility: With less government regulation, hard money lenders in Connecticut can set flexible credit scores and debt-to-income (DTI) criteria, and loans can help avoid foreclosure.
- Potential for interest-only payments: Unlike traditional mortgages, hard money loans may allow for interest-only or deferred payments initially.
What are hard money loans used for?
Hard money loans serve a variety of purposes in the real estate industry. Here are some common uses:
- Flipping a house: Flipping homes requires quick funding to purchase and renovate properties for resale. Hard money loans offer the necessary capital with less stringent approval processes.
- Buying an investment rental property: Investors looking to buy rental properties can use hard money loans to quickly secure properties in desirable locations.
- Purchasing commercial real estate: These loans can be used to acquire and renovate commercial properties, providing investors with the funds needed to develop income-generating assets.
- Borrowers who can’t qualify for traditional loans: Hard money loans are an alternative for those who may not qualify for conventional financing due to credit issues or lack of income documentation.
- Homeowners facing foreclosure: Homeowners in foreclosure can use hard money loans to quickly pay off their existing mortgage and avoid losing their home.
How much do hard money loans cost?
Hard money loans generally cost more than traditional loans due to the higher risk for lenders and the convenience of quick, flexible funding. Typical costs include:
Online calculators can help estimate these costs.
Alternatives to working with hard money lenders
If you’re a homeowner looking to leverage your current home’s equity, here are a few options to consider:
- Take out a second mortgage: A home equity loan or home equity line of credit (HELOC) can provide needed funds at a lower interest rate compared to a hard money loan.
- Cash-out refinance: This option allows you to refinance an existing property, pulling out cash to finance your new investment, often with lower interest rates than hard money loans.
- Borrow from family or friends: A personal loan from family or friends can offer flexible repayment terms and potentially lower or no interest rates.
- Use a government-backed loan program: Programs offered by the FHA, VA, or USDA can assist in purchasing homes with lower down payments and reduced interest rates.
- Peer-to-peer loan: Loans provided by individual investors through lending platforms function similarly to hard money loans but often come with different terms.
- Specialized loan programs: Consider specialized loans for fixer-uppers or investment property refinancing if you already have a hard money loan and seek to replace it.
- Request a seller financing option: In some cases, sellers may agree to finance the purchase themselves, resulting in lower closing costs and less stringent eligibility requirements.
How to buy before you sell
HomeLight’s Buy Before You Sell program is designed to help homeowners buy a new home before selling your current one. The program allows you to make a strong offer on a new home without the contingency of selling your existing property first. This can be especially beneficial in competitive markets where sellers prefer non-contingent offers.
The program works by providing a short-term loan to cover the purchase of your new home. Once you’ve moved in, HomeLight helps you sell your old home quickly and for the best possible price.
The costs associated with this program typically include interest rates ranging from 9.5% to 12%, depending on your situation.
Here’s how HomeLight Buy Before You Sell works:
Although there’s a flat fee of 2.4% of your current home’s sold price, the potential savings you could see in other areas might outweigh the cost. For example, you might save on moving expenses, temporary housing, and even the final purchase price of your new home.
3 top hard money lenders in Connecticut
Quick Real Estate Funding
Quick Real Estate Funding provides fast financing for investors in fix-and-flip, bridge loans, DSCR deals, and new construction. Established in March 2020, they serve real estate professionals across 40 states, streamlining loans by eliminating personal income verification and expediting closings.
Lending clientele: Residential and commercial real estate investors
Loan criteria: can finance up to 85% of the purchase price and cover 100% of the rehab costs (up to 70% ARV)
Quick Real Estate Funding has a 4.9 Google rating. One review noted, “Great communication from start to finish. Francine explained every step and convinced the seller’s agent to accept our deal. I’m thrilled to work with her and will continue on future transactions!”
Stormfield Capital LLC
Stormfield Capital, an institutional private credit manager since 2015, specializes in lower middle-market commercial real estate bridge lending. Leveraging a tech-enabled funding platform, the firm focuses on originating and acquiring short-term senior loans secured by commercial and residential investment properties. According to their website, the company has invested $1.2B in capital.
Lending clientele: Residential and commercial real estate investors
Loan criteria: Up to 90% LTC, Up to 70% LTV
Stormfield Capital, BBB accredited since 2017 with an A+ rating, holds a 4.4-star rating on Google. Clients praise their efficient service; one review stated, “Working with Christian and the team was the fastest, easiest commercial loan process we’ve experienced.”
Pinnacle Financial Services, LLC
Family owned and operated since 2005, Pinnacle Financial Services, LLC specializes in investment-purpose residential and commercial funding. They partner with experienced real estate investors throughout CT and Western MA, handling all funding, valuations, and inspections internally.
Lending clientele: Residential, commercial, and development real estate investors
Loan criteria: Funding up to 80% of the purchase price and covering 100% of renovations.
Pinnacle Financial Services, LLC maintains a 5.0 Google rating. According to one review, “Pinnacle Financial Services is a class act organization, led by Managing Partners Ian and Max Cohen. They offer competitive lending products, but it’s their exceptional service that sets them apart.”
Investing in real estate?
Hire an investor-friendly real estate agent who can help you get access to off-market properties at a discount and assess potential rental income based on market trends. HomeLight can connect you with investment property specialists at no cost.
Should I partner with a hard money lender in Connecticut?
Hard money loans are best suited for real estate investors, such as house flippers and rental property investors, who need quick access to funds and can manage the higher costs and risks.
However, if you’re a homeowner looking to leverage your equity, HomeLight’s Buy Before You Sell program might be a better fit. This program offers a seamless way to purchase a new home before selling your current one, avoiding the complications and higher costs associated with hard money loans.
Ultimately, choosing the right financing option depends on your goals, financial situation, and the specifics of your real estate project in Connecticut.
Consider consulting with a financial advisor or real estate expert to determine the best path for your needs. For more information, explore HomeLight’s resources to help you make an informed decision.
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