When you are preparing to apply for a new real estate loan, you may reach out to a few lenders or mortgage brokers to obtain a preliminary quote. After all, you want to crunch numbers and ensure that the real estate transaction makes financial sense for you. During these phone calls, lenders and mortgage brokers will usually ask similar questions in an effort to determine if your loan request meets their lending requirements. In some cases, you could be told that your loan scenario would not qualify for the financing that you would need. If you feel strongly that your transaction could turn a tremendous profit for you, there may be another financing source to consider. Hard money loans are an excellent alternative to bank real estate loans.
What You Need to Know About Hard Money Loans
A hard money loan is not usually competitive with bank loans. If a specific loan scenario qualifies for a bank loan, it is most likely not feasible for hard money loan terms. On the other hand, if a specific loan scenario is turned down by a bank loan, the terms of a hard money loan may be attractive. Hard money is another term for private money, and this is because private lenders offer hard money loans. You cannot apply for a hard money loan through a bank or another financial institution. While financial institutions have a long loan process and typically offer permanent financing with a very long loan term, hard money lenders have a very fast loan process and offer short-term or temporary financing with a balloon payment. Private lenders also have substantially more lenient underwriting guidelines than financial institutions have.
Typical Hard Money Loan Terms
As you can see, private lenders and banks are different in many important ways. These differences extend to the loan terms that they offer. A bank loan usually has a reasonably high LTV depending on the property type, the borrower’s credit score and other important factors. A hard money loan typically will not have an LTV higher than 70 to 75 percent regardless of the other factors. A bank loan may have a term that extends for up to 30 years, but a hard money loan may have a term length of 18 months or less. A bank loan is usually fully-amortized, which means that there is no balloon payment. A hard money loan commonly does have a final balloon payment due. One other very important difference is the interest rate. If you have a good credit score and other loan requirements are met, a bank may offer you a very competitive interest rate. The interest rate on a hard money loan, however, could easily be five to 10 percent above a bank loan’s rates.
Finding a Hard Money Lender
Hard money loans are a wonderful financing solution when a bank loan is not available or when you only need a short-term loan with lenient underwriting requirements. If you have decided to apply for a hard money loan, it is helpful to reach out to several reputable lenders. Because there are not firm and uniform underwriting guidelines for hard money loans, you will find that different private lenders have various requirements. Pricing also varies from lender to lender and from scenario to scenario. With this in mind, it makes sense to request multiple quotes from trusted and established private lenders.
Many real estate investors commonly try to compare a hard money loan to a bank loan. They compare loan terms and discover that a bank loan has more competitive pricing. However, the reality is that hard money loans are not used for the same types of scenarios that bank loans are used for. Because of this, it is not reasonable to make a direct comparison. Your understanding of these two financing solutions will help you to determine strategically which loan type to apply for.