At one point in your life you might have experienced financial difficulties due to one reason or the other. Generally, most individuals opt for a regular bank loan to help them with the financial situation, but such a move can only limit you in accordance with your credit score and income. Due to this, it’s now becoming more necessary to go for other options such as hard money loans that are more suitable for different situations. The good thing about handling money is that you can always work your way around it, and hard money loans basically give you an option to borrow regardless of your income or credit score. Therefore, it’s important to have a clear knowledge of what a hard money loan is, and how it can be achieved to aid solve your current and future financial demands.
What is a Hard Money Loan?
In order to best understand a hard money loan, it’s better to initially understand what a mortgage loan is, and how it works. For a traditional mortgage loan, the real estate borrower can only qualify for a loan based on their ability to repay back the loan based on their income and credit history. It’s necessary to keep in mind that a traditional loan can still be difficult to access due to the long processes of evaluation involved, even when you have a high income and a reputable credit score. On the other hand, a hard money loan is different in the sense that it provides another option for a real estate investor to borrow money and use an existing property as collateral or tangible asset. Therefore, at the end of the day, a hard money loan can always give you another way out of your financial emergency without paying much attention to your credit score or your income.
How to Operate With a Hard Money Loan
Before beginning your journey into accessing a hard money loan, it’s necessary to note that this type of loan may not always work for each and every one. However, it’s proven to be best for the less experienced real estate agent that has just started out their work. This is because, most beginners find themselves in a situation where they were short of capital and still need to build, market, and sell their property. Fundamentally, a hard money loan can grant you ownership of the property for a short period of time, where you’ll now be able to modify it and ultimately sell it so as to be able to repay the loan and earn some cash above it all. However, one key factor to keep as a reminder is that hard money loans typically have higher interest rates as compared to a traditional loan. Therefore, you don’t want to hold onto to it for a long period of time. In any case, hard money loans are generally given out based on a short term period of investment, usually about 6-24 months.
Benefits of Hard Money Loan and How Different it is From a Direct/Traditional Loan
Normally, a hard money loan is best for real estate investors that have a well laid out plan that can facilitate a quick sale of their property.
Consequently, this is quite achievable by having a distinguished real estate market research as well as a reliable marketing program. The key value of gaining a hard money loan is that you may essentially be in a better position to carry out several contracts at the same time, as well as own more property for less capital to pay upfront. Here are some of the major differences between a hard money loan and a direct/traditional loan:
Loan Authorization – Getting a hard money loan primarily depends on your property valuation. By owning a higher priced property, you can have the ability to access a bigger loan and without much emphasis on your credit history and familiarity on the matter.
Loan Speed – By owning a clean property without hitches, it’s easier to close down on a loan borrowing process. This is because hard money lenders are least concerned about your financial capability, but are more interested in the value of your property.
Doable Schedules of Repayment – Hard money lenders are commonly not tied down to stringent restrictions and regulations unlike traditional loan lenders. This only means that hard money lenders are flexible and can readjust the repayment plan and circumstances as well.
Hard money loans are seen to be quite effective especially if you’re starting out on real estate. Despite the fact that they’re several factors to consider, hard money loan can always facilitate your investment by guaranteeing a quick loan to help you develop at a more rapid pace.
Some Basics Behind Hard Money Loans
A hard money loan is a borrowing option you have without going through a traditional mortgage company. Most of the financing comes from private investors or entities. The total amount you can borrow is based on the value of the project or property. Hard money loans are popular among real estate investors. Here are some facts about these loans that will help you make smart financing decisions.
Hard Money Loan Basics
Hard money loans are not as widely available as traditional mortgages. If you want to make a regular home purchase, these loans are really not an option. Most hard money loans are for investment purposes only, and lenders do not provide financing for noninvesting objectives.
The terms are set for repayment over a short period of time. In most cases, the terms range from one to two years. One of the popular features of these loans is quick access to working capital. Instead of waiting weeks or even months to get cash in hand from a traditional loan, hard money loans usually fund in a few business days.
The difference between a hard money loan and a regular mortgage is how you repay the loan. Rather than making equal payments each month, you pay interest on how much of the loan you use during the loan term. Once the loan term ends, the remaining principal balance becomes due.
When to Use Hard Money Loans
If you are a real estate investor and have not made the plunge into hard money financing, here are some common situations where these loans are a good choice:
• Less Than Ideal Credit- It is difficult to qualify for a traditional mortgage if you have shaky credit. It is next to impossible to qualify for investment purposes from a regular lender if your credit is less than average. Your score does not impact qualifying for a hard money loan as much as it does a traditional loan. Hard money lenders place more emphasis on the value of the investment than they do your credit score.
• Need Access to Fast Capital- If you need money for an investment opportunity right away, a hard money loan is a solid choice. Real estate markets move fast, so that good investment you found today could be gone tomorrow. Traditional loans can take weeks to complete, which is not ideal for a rapidly changing housing market.
• Limited Financing Options- It is not easy to finance a real estate investment, especially when mortgage lenders have strict requirements. Hard money loans do not have as many requirements as regular lenders, so you have a better chance of securing the financing you need.
Hard Money Loan FAQs
If you are new to hard money loans, you might have a few questions about the ins and outs of these loans. Here are some frequently asked questions and answers to help take some of the mystery out of these loans.
Are the interest rates higher on hard money loans?
Since there is no guarantee you can pay the loan back with your income alone, lenders often charge above-average interest rates.
What types of investment properties can I buy with a hard money loan?
There is no limit to what property you can buy with these loans. If you can prove your investment is valuable, then hard money lenders will give you the financing you need for virtually any property type.
Can I use a hard money loan to renovate a home?
Many investors use hard money to buy and renovate properties. Some lenders give you a part of the money right away to start repairs based on the after-repair value (ARV) of the property.