About Hard Money Loans
Hard money loans are real estate loans and there are a variety of different types, such as bridge, fix-and-flip, construction and owner-occupied. In most cases, these loans are made based on your collateral as opposed to your ability to repay the loan. Hard money lenders are private individuals and companies that fund loans based on varied criteria. These lenders are often flexible and willing to provide custom loans to accommodate your needs.
Let’s take a closer look at the above referenced loan types. Just as the name implies, fix-and-flip loans let you buy a rehab property, fix it up and resell it, then pay the loan off. A bridge loan enables you to buy a property now, even before getting the cash down payment by selling a property that you presently own. You can also use a bridge loan to buy a property fast and then resell or refinance it. Real estate developers use construction hard money loans for new construction projects and they either resell or refinance it immediately.
Owner-occupied loans are different because these loans are not for investment purposes, but for consumers who are unable to qualify for other types of loans, but desire to purchase property that they will occupy. Owner-occupied loans are less common in the world of hard money lending since there are a lot of regulations associated with consumer loans, such as Dodd-Frank. There are also different licensing requirements. While most hard money lenders do not provide owner-occupied loans, there are some that do offer this product.
How Hard Money Loans Work
One of the benefits of hard money loans is that the application process is fast and usually takes less than a week. Generally, you will be required to have a down payment and it will often be determined by the Loan-To-Value (LTV) ratio or the After-Repair-Value (ARV) ratio. Just keep in mind that each lender is different and the requirements can vary greatly.
A unique aspect of hard money loans is that they are for a very short term that could be a couple of years, but is more often 12 months. Instead of making monthly payments that consist of the principal and interest like many traditional loans, you will make interest only payments. Some hard money loans don’t require you to make any payments at all, which can make this type of loan appealing to real estate investors. At the end of the term, you will bring the balance to zero through a balloon payment that consists of the principal, the remaining interest and any fees.
Is a Hard Money Loan Right for You?
When people are unable to qualify for a traditional loans, a hard money loan might work because the lenders are more willing to create a custom loan product. Hard money loans are often chosen by people who have bad credit and need money fast. These loans have also become popular because the requirements are more lenient and you’re able to get the money that you need quickly.
When it comes to weighing the benefits and the downsides of hard money loans, some borrowers recognize that having access to quick money can allow them to take advantage of more investment opportunities, which can mitigate concerns. Nevertheless, it’s important to move forward cautiously and ensure due diligence when making a decision.