Things would be much less painless for many people if everyone was able to easily receive the same type of mortgage for the home that they want. Unfortunately, it isn’t that simple. Some would-be homeowners cannot qualify for a conventional mortgage and must turn to an unconventional solution, such as a hard money loan. Understanding just what hard money loans are and how they can benefit you is the first step to making an informed decision on your finances.
What are Hard Money Loans?
To put it simply, a hard money loan is a loan given out for real estate purposes. A hard money loan isn’t given based on your ability to repay it. Instead, they are based on the value of the collateral you can put up, such as the property you plan to own or already own.
Borrowers can choose between various types of hard money loans, including:
These are just a few of the various types of hard money loans available. Lenders typically consider each case on an individual basis and may approve loans for different purposes.
How Do the Loans Work?
Hard money loans are usually given out only for investment purposes. What does this mean? To answer the question, this means that most lenders will not lend you any money if you are planning on funding your own private loan. Most loans are given out for a shorter amount of time than other traditional loans, usually for less than a few years. Many are only for one year at a time.
Hard money lenders also offer an easier application process than other types of loans. To be approved, you will need to put up some money of your own. The lender will ask for a certain amount of money from you on the LTV ratio, or Loan-To-Value, or the ARV ration, or the After-Repair-Value. As an example, a lender may base their loan on an 80 percent LTV ratio. If you are looking to purchase a home for $100,000, you will need to have at least $20,000 first.
Paying the Loan Off
Lenders will only require that the interest is paid during the months the loan is out. At the end of the loan, you will have to pay it off with one balloon payment. This payment will cover the whole principal of the hard money loan, as well as any fees or remaining interest.
Benefits of a Hard Money Loan
The term “hard” may be a bit misleading in this case. These types of loans can actually provide easy, straightforward benefits for those investing in real estate:
Fast cash- One of the biggest perks is the fact that lenders can usually fund the loan within a week or less.
Easy requirements- A traditional mortgage will require proving a certain level of income and debt. They also take credit scores into major consideration. Hard money lenders will often check these things, as well, but they are usually more interested in what type of collateral you can offer in exchange for the loan.
Flexible terms- Lenders are usually more likely to help you create a custom loan that fits your specific situation. Most major banks will not.
Increased opportunities- Receiving a hard money loan allows you more flexibility when it comes to grabbing a great real estate investment deal. You do not have to wait for weeks to get the cash you need, which can make you miss out on a great opportunity.
Choosing a Hard Money Loan
This type of funding is perfect for when you cannot find funding elsewhere. It is also good for those who do not have a good credit score and who need the money quickly. Real estate markets can move at a remarkably fast speed, so having the choice to apply for and receive a quick loan is a good idea.