If you’re looking for a way to borrow money for the purchase of real estate, but can’t qualify for a traditional mortgage loan, you have options. You’re also not alone since even people with good credit and solid financial footing have problems with mortgage lending. Hard money loans are an alternative solution and the information below offers insights into this mortgage loan product.
About Hard Money Loans
While traditional mortgage lending focuses on your ability to repay the loan, a hard money loan is different in that the primary consideration is the value of your property, which is used for collateral. Hard money lenders are individual investors and firms that assess applications on a case-by-case basis, which means they consider funding for different purposes – even when there are issues like bad credit, foreclosures or bankruptcies.
Some of the different types of hard money loans include the bridge loan, fix-and-flip loan, owner-occupied loan and construction loan. The owner-occupied loan is less common because hard money lenders want to avoid the regulatory nightmare that they tend to create, which results in compliance requirements that would not otherwise exist. However, there is still a small percentage of hard money lenders that offer owner-occupied consumer loans.
Bridge loans let you buy a property before you get the cash down payment from the sale of a property that you currently own. This type of loan also enables you to buy a property fast, then refinance or resell it.
The fix-and-flip loan is used to rehab a property that you plan to resell, then pay off the loan. There are also new construction loans where the real estate developer will either refinance or sell the property as soon as possible.
A Closer Look at Hard Money Loans
Why would a hard money loan appeal to a real estate investor? That question makes sense given the nature of these loans. There are several good reasons. For starters, the application process is easy and the turnaround time can be less than a week, which means financing is fast. There’s also the aforementioned issue of not qualifying for other types of loans and needing a lender that will base their decision on your individual situation as opposed to rigid requirements.
Generally speaking, you will have to put money down, and the amount is based on the Loan-To-Value (LTV) ratio or the After-Repair-Value (ARV) ratio. Once funded, instead of monthly principal and interest payments, there’s a possibility that you will only be required to make interest payments. Some loans don’t even require monthly payments, you simply pay the loan off when the term ends in the form of a balloon payment. This final payment that’s used to settle the balance will include the principal, all interest and any fees.
Is a Hard Money Loan Right for You?
Trying to figure out whether a hard money loan is right for you will require an assessment of your situation. For the most part, people who choose hard money loans are unable to find a better mortgage lending product, have a low credit score or need money right away. They move forward realizing that hard money loans have high interest rates, a lack of government oversight, short terms and possibility a lot of fees. There’s also the potential of problems with refinancing because of traditional mortgage lending requirements.
Part of the decision-making process involves acknowledging the advantages, including the lenient requirements, flexible terms and fast access to money – sometimes in less than a week. Although there are pros and cons, perhaps it’s just a matter of having an investment strategy and needing a tool to help you reach your goals. While a hard money loan won’t work in a buyer’s market, it can work in many other situations.
Hard money loans are for everybody, but there are a few situations in which investors stand to gain the most from hard money loans. Whether you need quick cash or you’re just looking at all the options for financing your investments, hard money loans might be the solution you need.
Who are Hard Loans for?
If you find yourself in the following scenarios, going to a hard money lender is likely the right choice for you:
- You’ve looked for funding everywhere else and have been turned down.Investors that work in the real estate industry are used to the “try and try again” mentality. Even if an investor may technically meet all the requirements for other financing options, they may still fail to qualify for the funding they need.
If you find yourself in need of financing with nowhere else to turn, hard money loans are for you. Instead of applying and waiting just to be turned down again, find a hard money lender in your area to set up a consultation with.
- You’re working on your credit and you aren’t in good financial standing.Credit scores and money lending don’t have to be mutually exclusive. If you’re working on rebuilding your credit, you’ve likely been turned down by the more traditional financial institutions.
Thankfully, hard money loan lenders are their own private institutions and tend to focus on what you bring to the table, rather than what numbers are on your credit score. If you have the collateral and can make the down payment, most lenders will be happy to loan you the capital.
- You are trying to purchase a property and need financing immediately.Fast financing is the name of the game with hard money loans. This is invaluable for real estate investors that have to act on a property almost immediately. If you need access to funding to move forward with your investing plans, the hard money loan is a valid option for your business.
- You need a loan for a short period of time.As more popular financing options are quite lengthy (think of the 30-year mortgage), hard money loans are only given for very short periods of time. Most lenders’ loans last up to a few years, with some lasting only a few months. Most people that are investing in real estate (like the fix-and-flippers) like to move quickly. Hard money lenders know this and are happy to work with financing your renovation purchases.
- You need a customized loan that other lenders don’t provide.For many real estate investors, each property purchase is a unique deal that comes with its own set of stipulations. If you find that you need a specific loan agreement to meet your specific needs, it is better to seek out a hard money lender. While banks and other financing alternatives may be able to provide you with the funds you need, they rarely diverge from giving out traditional loans, like a standard mortgage.
With a hard money lender in Carrollton, Texas, you’ll find that they are willing to discuss customizing a loan that will allow you to pursue your unique real estate ventures, regardless of how conventional your situation may be.
- You’ve used hard money loans before.Many investors choose to work primarily with hard money loans as they’ve had success with them in the past. As these loans provide guaranteed funding, real estate investors can carry on their businesses with a level of consistency that wouldn’t be possible if they lacked the same access to cash.
As you review the many situations that qualify for a hard money loan, you may find that your investment venture is the perfect fit. If you’re ready to move forward with this fast financing, what better time than right now?