With the real estate and housing market picking up, many people are using this time to purchase homes and real estate property. Many of the borrowers find that hard money loans are their best option. Just what is a hard money loan and where can a borrow get one? Read on and get the facts.
What is a Hard Money Loan?
A hard money loan is a loan used to purchase property in a hurry. Unlike conventional mortgage loans or soft money loans that have terms from 10 to 30 years, hard money loans are for short terms. Hard money loans are usually for one year, although they may go up to 36 months.
Hard money loans are typically used by individuals who are purchasing property and need money in a hurry. With a conventional mortgage loan, it can take weeks for the loan to close. Hard money loans can be completed in as quickly as a day or two. The main reason hard money loans can be obtained so quickly is because they do not have the same rigid requirements as soft money loans.
To be eligible for a soft money or conventional loan, the borrower would have to meet certain credit, income and employment requirements. Hard money loans, on the other hand, are based on the value of the property and the borrower’s equity. In most cases, the borrower’s credit history and income have no bearing on the approval process whatsoever.
Benefits of Hard Money Loan?
Hard money loans come with many benefits.
• Fast Approval – Because the lender or investor doesn’t have the same strict requirements, the approval process is much quicker with hard money loans. The hard money lenders evaluate a potential borrower’s creditworthiness differently than a conventional bank, so the loan gets approved much quicker.
• More Flexible – Because you’re dealing with an investor or a group of investors, the loan terms are not going to be quite as “carved in stone” as with conventional loans. Investors are more likely to be willing to negotiate a payment plan that works for both of you.
• Credit Not a Problem – With conventional mortgage loans, your credit history is probably the most important factor used to determine if you’re approved for the loan. Hard money loans are based on the property’s value so credit scores aren’t that important. This is also a reason why hard money loans are good for new borrowers who may have bad or limited credit and might not get approval from conventional lenders.
Disadvantages of Hard Money Loan
As beneficial as they can be, hard money loans also have some disadvantages.
• Higher Interest Rates – Hard money loans have interest rates substantially higher than conventional mortgage loans. They may be as high as 15 percent to 20 percent. Their loan fees are generally higher as well.
• Shorter Loan Terms – The terms of hard money loans are usually one to three years, unlike conventional loans that may go up to 30 years.
• Possible Loss of Property – Because hard money loans are based on the value of the property, and the property is the collateral, you can lose the property if you fail to meet the terms of the loan.
• May Be Difficult to Refinance – Some conventional banks require you to own property for a certain length of time before they’ll refinance it. If you’re not able to pay off the hard money loan and need to refinance it through a conventional lender, it could be a problem.
Where Can I Get a Hard Money Loan?
The fact that hard money loans come from investors or investment firms rather than banks does not mean that hard money lenders are that difficult to find. There are many investment companies that offer hard money loans. Investment firms are located in most areas where you find conventional banks. Finding the right hard money lender involves research so you know you’re getting the best possible deal with your hard money loan.