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.