There may be some instances where a hard money loan is a better option when you are looking to borrow money. A hard money loan is essentially a short term type of loan that should only be used as a last resort. It is a loan that is backed by the value of a property instead of the borrower’s creditworthiness. These loans typically have lower loan-to-value ratios than other loans due to a property being the only protection for the lender in the event the borrower defaults on it.
Who is a Hard Money Loan For?
Generally speaking, hard money loans are funded by private investors instead of by banks or other financial institutions. For that reason, they are frequently referred to as private money loans. The amount of money in a hard money loan depends on the specific value of the property that is backing it instead of the borrower’s credit score and credit reputation. The loan-to-value ratio (LTV) also helps to determine the amount of the loan. This is generally determined by the amount of the loan divided by the value of the property being used as collateral toward the loan.
Hard money loans are typically easier to obtain and faster to get than regular loans. At the same time, the borrower has to go through a stringent process to be able to qualify for certain loan terms. Property flippers, individuals who own a property, renovate it and then sell it are the most common borrowers of hard money loans.
How Does a Hard Money Loan Work?
These loans are also commonly referred to as bridge loans. They are often used by people who own property they want to fix up with remodeling projects and then flip that property. Hard money loans have terms that usually range from six to 24 months. Likewise, the term of the loans cannot be extended past five years. The borrower is also required to pay back the loan on a monthly basis and usually pay only interest or interest and some principal. Hard money loan terms can vary depending on the lender, usually based on the borrower’s property and history.
How Does a Hard Money Loan Differ from a Traditional Loan?
There are a few ways that hard money loans are different from traditional loans. Generally, they differ from financing from a bank because they provide more leverage to the borrower. Hard money loans also differ from traditional loans due to the following:
• Speed: Getting a hard money loan is much faster than getting a traditional loan. This is largely because the lender isn’t worried about your credit. You can qualify for a hard money loan in only a few days if your property is on the up and up.
• Adjustable repayment schedules: Hard money loans have more flexible repayment schedules, which can be adjusted.
• Approval: Approval of a hard money loan is based on the value of the property being used as collateral. In contrast, traditional loans are based on the borrower’s credit.
How are Hard Money Loans Used in Real Estate?
In general, hard money loans are most frequently sought by property flippers who have the intention of renovating the property and reselling it. The property they are renovating is what serves as collateral for financing of the hard money loan. The reason why these loans are so attractive to such borrowers is because they expect to sell the property within a period of one year or less and pay the loan back with money they earn from the real estate sale. Additionally, the higher costs of these types of loans are often offset by advantages the borrower can get from the loan.
Overall, there are many advantages to a hard money loan for the right kind of borrower. If you are looking to remodel or renovate a property you are planning to sell, you can really benefit from this type of loan.