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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.
Hard money loans are the financing solution that most real estate investors use as their go-to for every property purchase. Though hard money loans are a valid option in some situations, many people that are new to the application process aren’t sure how or even if they qualify for a loan.
How to Qualify for Hard Money Loans
While many in the industry see hard money loans as quick financing solutions, this is only the case if one meets the requirements for approval. If you’re interested in applying for a hard money loan, you’ll need to consider the basic qualifications.
Meeting the Borrower Requirements
Borrower requirements for hard money loans are quite different than requirements for other financing alternatives. Most hard money lenders in Centennial, Colorado are private individuals and institutions that aren’t regulated in the same manner that a bank might be. To that end, there is more variability with what a lender is looking for in a borrower.
If you’re looking for a hard money loan, lenders will likely be aiming to see what type of collateral you’ll be using. Investors that have recently purchased a property can use this as collateral. If you are going to do a fix-and-flip, it is important for you to appraise the property for its after-repair value. Most hard money lenders will ask for a full appraisal for your property.
Reviewing Your Finances
Other lenders may want to review your finances, so keep that in mind. While most hard money lenders won’t consider your financial standing when deciding whether or not to lend to you, others might.
Even if you have collateral, some lenders will require you to provide a down payment of some sort. This down payment might be a certain percentage of the property value based on its ARV. In this scenario, you would need to prepare to make a larger initial payment as the current value will be lower than the ARV.
Though these are just a few standards most hard money lenders might look for, every lender is different. The best way to determine if you meet a lender’s requirements is to visit their site or ask them yourself.
Assessing the Interest Rates
Hard money loans are notorious for their incredibly high interest rates. With sky-high rates that rival those of credit cards, hard money loans are certainly not cheap. Most lenders will charge anywhere between 5.4% APR to 15% APR, and sometimes even more.
Though these interest rates are ever-climbing, they are only charged for the period of the loan. As most hard money loans are short-term, most investors find the loans to be valuable, even with the interest rates.
If you took a loan out for $1000,000 with an APR of 15% for a year, you should anticipate a monthly interest of $1,250 for 11 months. At the end of the loan, you’d make one payment of $101,250. While this is certainly not chump change, it is oftentimes the best case scenario for many investors.
In addition to the interest rates, investors can expect to pay a fair amount of fees. Most lenders will tack on additional fees to the loan, including an origination fee, a prepayment fee, an underwriting fee, and other expenses. While some lenders are upfront about these fees, others will try to sneak them in.
Finding Reputable Lenders
Just as a lender wants to make sure you meet their requirements, you need to ensure they do the same for you. Start your search for a reputable lender by contacting local investors. Those that are in the know will help you find experienced and trustworthy lenders. Similarly, do a search online to see if any blogs have directories with names of local hard money lenders.
Though the cash can come quickly with hard money loans, it pays to take your time when choosing what works for you. Keep all of the above information in mind as you prepare to take on your next real estate venture.[flexy_breadcrumb]