If you have had challenges securing a traditional mortgage, then you might be interested in learning about hard money loans, which are primarily for the purpose of real estate investing. A simplified loan process and lenient requirements are just two of several reasons why some people choose hard money loans. The information below provides an overview of this loan product, including what you need to know before making a decision to pursue a hard money loan.
Types of Hard Money Loans
When it comes to hard money loans, there are options that accommodate the needs of different real estate investors. Common examples include the construction loan, bridge loan and fix-and-flip loan. There’s also the owner-occupied loan, which is a non-investment version of hard money loans. This loan product is unique because the lenders are private individuals and companies that make decisions based on criteria that varies to a large degree. Hard money lenders often fund loans that traditional lenders probably wouldn’t touch. Here are more details about hard money loans for investment purposes:
Fix-and-flip loan: Allows you to buy a fixer upper to quickly sell and pay the loan off.
Bridge loan: Enables you to buy a property fast, resell or refinance it. You can also buy a new property before you get the cash down payment from selling a property that you already own.
Construction loan: Allows a real estate developer to start a new construction project, then refinance or sell the property.
In some states, it’s been reported that 90% of hard money lenders don’t provide consumer loans. This is mainly because they involve a lot more regulations. For instance, hard money lenders of consumer loans for private properties would have to comply with the Dodd–Frank Wall Street Reform and Consumer Protection Act, among other regulations. They would also have additional licensing requirements.
How Hard Money Loans Work
One of the ways in which hard money loans are drastically different than traditional bank mortgages is that the term is usually for a couple of years, and often just 12 months. Instead of making equal monthly payments comprised of the principal and interest, the borrower would make interest-only payments. There are some hard money loans that don’t require you to make any payments at all.
The financing process for hard money loans is streamlined and often takes about a week or less. Generally, you will be required to put cash down, which will be a function of the property’s Loan-To-Value (LTV) ratio or the After-Repair-Value (ARV) ratio. At the end of the loan period, you will make a balloon payment to zero out the balance, which includes paying the principal, interest and all fees.
Benefits of Hard Money Loans
There are pitfalls associated with hard money loans, such as high interest rates, short terms, high fees and lack of governmental oversight. However, there are also advantages, which is the reason why a lot of people choose this option.
One of the main reasons why real estate investors choose hard money loans is because it provides them with fast access to money that’s needed for an investment opportunity. It’s access to money that they would not otherwise have. Other reasons why hard money loans are considered a viable option is because the terms are flexible and lenders take into account the prospective borrower’s specific situation. This is unlike most bank products that are stringent and don’t allow room for customization.
Essentially, hard money loans are resources that real estate investors can use as part of their strategy. Sometimes hard money loans are simply a solution for someone who doesn’t have any other option. However, some investors realize that the pros of hard money loans outweigh the cons.