We grew up hearing the term “cold hard cash” in reference to good old fashioned cash. Now the term “hard money loan” is frequently used. However, the two have nothing to do with each other. While hard money loans do represent cash, that’s where the similarity ends. Here is an overview of hard money loans, including why they’re used, what they entail and how they differ from conventional loans.
What is a Hard Money Loan?
Hard money loans, often referred to as private money loans, are short-term loans used to buy real estate and secured by real estate. Unlike regular loans that are funded by conventional banks and credit unions, hard moneyloans are funded by private investors or investment companies. They generally run for a year but can be extended up to five years. During the term of the loan, the borrower usually makes interest-only payments or possibly interest and a little of the principal.
They are very similar to balloon payment loans in that the final lump sum is due at the end of the term. Hard money loans are used most often by real estate investors or house flippers. Because the real estate is the collateral on the hard money loans, they’re approval is based on the value of the real estate being purchased.
Why Are Hard Money Loans So Popular?
Real estate developers and house flippers particularly like hard money loans because they’re often able to borrow up to 100 percent of the purchase price of the real estate they’re buying, unlike conventional mortgage lenders who require down payments that can go as high as 20 percent. House flippers often buy homes at auctions so it’s important that they have access to the cash quickly, which is another reason why they’re so popular. There are other reasons why hard money loans are so popular.
• Approval is much quicker than with regular loans at banks.
• Funding is much faster as well. The borrower may have the money in a day or two after applying. This can make the difference of a real estate investor getting or missing out on a good deal.
• Credit scores are not important. Even borrowers with poor credit can get card cash loans because the loan is based on the real estate value as opposed to the borrower’s credit.
• Borrower may have more than one hard money loan at one time. Hard money lenders may approve a couple loans at one time if the real estate value allows it.
• Borrowers may be allowed to cross-collateralize property from one loan to another if there are more than one hard money loans at a time.
Where Are Hard Money Loans Available?
Hard money loans can be found in many areas and most major cities. If looking through the yellow pages or searching online doesn’t find you plenty of hard money lenders, you may want to consider contacting real estate agents in your area because they often have contact with these lenders. Mortgage agents and mortgage brokers may also offer information on where you can find lenders who deal with hard money loans.
How Hard Money Loans Differ From Conventional Loans
Hard money loans differ from conventional loans in various ways. Here are just a few ways.
• Hard money loans are funded by private investors as opposed to banks and credit unions.
• Interest rates and lending fees are much higher than regular loans.
• Hard money loans are short term whereas conventional mortgage loans can run from ten years to 30 years.
• Funding for hard money loans may come through in a couple of days whereas conventional mortgage loans can take more than a month to close.
• Because the hard money loans are investor-funded, the borrower may get more flexible loan terms and payments.
• Hard money loans are not approved based on credit, but conventional loans use credit scores as almost their top priority.