Type Of Real Estate Loan
A hard money loan is a form of real estate loan. They are based on the value of a person’s collateral. This could be the property itself. It is not based on an individual’s ability to pay. There are various types of hard money loans.
*Construction Loan – These loans are designed for a real estate developer to have the ability to quickly start on a new construction project. The goal of this loan is selling the property quickly or refinancing the loan.
*Bridge Loan – These are designed to help an individual purchase property quickly with the goal of selling the property or refinancing it. This can also be used when a person wants to buy a new property but doesn’t have enough cash for a down payment from selling the property they currently own.
*Owner-Occupied Loan – This loan makes it possible for a person who doesn’t qualify for any other type of financing to buy real estate for themselves.
*Fix And Flip Loan – These loans enable a person to purchase a rehab property and quickly fix it. The goal is then to resell the property and pay off the loan.
*Other – Hard money lenders are often private firms and individuals. They consider loans on a case-by-case basis. These private firms and individuals will consider lending money for many different reasons.
How Hard Money Loans Work
They are not loans available to everybody. Most hard money lenders do not give hard money loans for non-investment situations. If someone believes they can use a hard money loan to purchase their private home, it may not be possible. Hard money loans are only provided for a short amount of time. It most cases, it must be paid in a few years and many have a 12-month term. Hard money loans provide those who use them with a variety of advantages. They provide fast financing, short loan term lengths, and a simplified application process.
Payment Of Hard Money Loan
Someone wanting a hard money loan will need to have some of their own money to start the process. In each situation, a lender will require a certain amount of cash based on either After Repair-Value (ARV) or Loan-To-Value (LTV). A hard money loan is paid off in one giant balloon payment at the end of the loan term. This covers all of the loan principal as well as fees associated with the loan and interest.
Disadvantages Of Hard Money Loans
There are a lot of advantages that come with a hard money loan and also disadvantages that should be considered.
*Refinancing Red Tape – Many traditional mortgage lenders may require an individual to own a property for a specified length of time before being permitted to refinance. This can be a problem for individuals if their hard money loan is due prior to being able to refinance another loan.
*High-Interest Rates – The interest rates for hard money loans are commonly double digits. This is because hard money loans are usually designed to be paid off within three years. They are not meant to be paid over a period of 30 years.
Short Terms – A hard money loan will come with a short payback period. This means the payback options could be to apply for a loan extension, sell a property prior to the loan being due or refinance into a traditional mortgage.
Lack Of Oversight – When it comes to hard money loans, there is very little oversight by the government. This is why it is essential a person completely understand all aspects of a hard money loan before getting one. An unscrupulous lender could cause someone a lot of problems.
High Fees – A hard money loan will come with high-interest rates but lenders often charge a variety of fees. This could include underwriting fees, origination fees, construction draw fees and more.
A hard money loan is something that can be a huge help in certain circumstances. If someone believes they could benefit from a hard money loan, they should contact local real estate investors. Lender reputations are known in the real estate investor community. Experienced investors can mention good hard money lenders and can also suggest which ones need to be avoided.