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A hard money loan is an alternative to a traditional mortgage loan. It’s a tool that’s often used by real estate investors and developers who appreciate that hard money loans are fast and easy. While it would be great if there wasn’t a need for hard money loans because traditional bank loans met the needs of all real estate investors, that’s not the world in which we live – nor is it realistic. Keep reading to learn more about hard money loans. You can gain insights to determine if this loan product is right for you.
About Hard Money Loans
Hard money loans are for real estate investing and they primarily consider the value of your property as collateral. This is unlike traditional loan products that make decisions based on your ability to repay the loan, which means assessing your credit and income. Not that your financial standing is insignificant to hard money lenders, it’s just not the determining factor in most cases. There are different types of hard money loans, such as the construction loan, bridge loan, fix-and-flip loan and owner-occupied loan.
You can use a bridge loan to buy a property now, then resell or refinance it. You can also use a bridge loan to buy a new property before you get a cash down payment from selling a property that you already own. The fix-and-flip loan enables you to purchase and then fix up a property to resell right away, then pay the loan off. Construction loans enable real estate developers to start a new construction project and then either refinance or sell it. There’s also the less common owner-occupied loan for consumers who cannot qualify for other lending options. In order to avoid having to comply with numerous regulations, hard money lenders tend to avoid owner-occupied consumer loans.
How Hard Money Loans Work
Perhaps one of the main reasons why real estate investors appreciate hard money loans is because the application process is easy and financing doesn’t take a long time. In fact, it can take less than a week to complete the process. Although the criteria varies form one lender to the next, you will likely need a down payment that’s determined based on the property’s Loan-To-Value (LTV) ratio or After-Repair-Value (ARV) ratio.
The loan period for hard money loans is 12 months to a few years. Instead of principal and interest, the monthly payments made for these loans is often interest only. There’s even a possibility that you will not have to make any payments until the loan matures, at which point you will need to make a balloon payment. That final payment will include the entire loan principal, all of the remaining interest and any fees.
Is a Hard Money Loan Right for You?
If you are able to quality for a traditional bank loan and you have time for the lengthy process, then that might be the best option for you. However, if you are unable to qualify for another type of loan, then a hard money loan is worthy of consideration. Some of the concerns that people have about hard money loans include the high interest rates, short terms, high fees and lack of government oversight. There’s also the possible issue with refinancing due to traditional lending guidelines. These are all valid points that must be assessed.
Many real estate investors and developers understand the issues associated with hard money loans and still choose them because of the advantages. Having access to quick money, the relaxed requirements and the flexible terms are all reasons why a hard money loan works for so many people. If you are in a seller’s market and you need money for a real estate investment, a hard money loan might be a good option.
Hard Money Loans Explained
This is a specific type of loan geared only for real estate. Many traditional lenders will not offer them, but lending firms such as Delancey Street do. When granted, the loan takes into account the value of your collateral, usually in the form of the property itself, as opposed to your actually ability to pay back the loan.
It is important to know that there are quite a few types of hard money loans. Some of the more common include:
- Construction Loan – This is typically given to a real estate developer who need access to money quickly in order to get a construction project off the ground. The objective of this type of loan is to either refinance or sell the finished structure as soon as possible.
- Bridge Loan – With this type of hard money loan, you will be able to quickly buy a property that you want to sell right away or refinance. It can also enable you to buy a new piece of real estate today and then receive enough cash for the down payment once a property you currently own is sold.
- Owner Occupied Loan – If you do not qualify for any other form of financing meant for a real estate purchase, this type of hard money loan can give you the money that you need to buy a property for your own use.
- Fix and Flip Loan – This type of loan is for a real estate investor who wants to buy a property, fix it up, and then sell it as soon as possible in order to pay the loan off in full.
There are other types of hard money loans as well. You will just want to speak to a lender specializing in these types of mortgage solutions to see what is possible for you.
How They Function
First of all, keep in mind that hard money loans are typically only approved for investment purposes. You will not find too many possibilities to help fund a private home purchase, but they are out there. To find out if you qualify, you will want to talk with the specialists at Delancey Street to see what is possible.
What makes a hard money loan different from a conventional mortgage is the length of time that you will have to pay it off. The typical length of the loan is no more than a few years at most. The average is about 12 months. Another difference is that you will usually not need to make any payments against the principle during this time. Instead, you will either be asked to make interest only payments or nothing at all until the entire loan comes due in full.
There are several benefits to hard money loans when it comes to real estate investors. It is one of the quickest ways to achieve financing available in the market today. You can often have access to the money you need in under a week. The application process is simple and straightforward as well. Contact Delancey Street today to learn how hard money loans may work for you and your situation.[flexy_breadcrumb]