When a traditional mortgage loan is not an option, real estate investors and developers often depend on hard money loans to fund their projects. It’s simply a fact of life that traditional mortgage loans don’t always work out during a real estate purchase. There are even instances when a high credit score and plenty of income will not meet the requirements of a traditional mortgage lender. If you have considered whether a hard money loan can work for you, keep reading to gain insights into this mortgage loan product.
About Hard Money Loans
As an asset-based loan, hard money loans are made based on your property as collateral and hard money lenders are less concerned with your ability to repay the loan. Hard money lenders are individual investors and investment firms who assess each loan to make a lending decision. The criteria is much different than that of traditional mortgage lenders who are often required to follow standard and more rigid requirements.
Hard money lenders typically make concessions for issues like poor credit, bankruptcies or foreclosures. They are able to do this because there is collateral involved. There are different types of hard money loans, such as the fix-and-flip loan, bridge loan, owner-occupied loan and construction loan. Owner-occupied loans are less common because they require adherence to far more regulations, which can become a regulatory nightmare for hard money lenders as they end up having to comply with Dodd-Frank and require certain licensing when providing consumer loans.
If you want to buy a property fast and then resell or refinance it, a bridge loan might be the right solution. You can also use a bridge loan if you want to buy a new investment property now before you get the cash down payment by selling a property that you already own. Fix-and-flip loans let you buy a fixer-upper to resell, then you can pay off the loan. Real estate developers are able to use construction loans to start a new construction project, then sell it or refinance it.
How Hard Money Loans Work
The reason why hard money loans often appeal to real estate investors is because the application process is both fast and easy, which is something that just isn’t the case with traditional mortgage lending. There’s a chance that it could take less than a week to get financing through a hard money lender. Borrowers will usually have to bring cash for a down payment that is a function of the Loan-To-Value (LTV) or After-Repair-Value (ARV) ratio.
One of the biggest differences between a traditional mortgage and a hard money loan is that they are for a short period of time, which can be from 12 months to several years. As opposed to making regular principal and interest payments each month, borrowers will often make interest only payments. There’s even a possibility that you won’t make any payments at all. Just keep in mind that every hard money lender is different and their requirements vary to a large degree. When the loan matures, you will bring it to a zero balance by making a balloon payment. This final payment will include the principal, any remaining interest and all fees.
Is a Hard Money Loan Right for You?
If you’re considering a hard money loan, you should know that they have high interest rates, extremely short terms and often a lot of fees. There’s also very little government oversight for these types of loans. Additionally, you could have problems refinancing the loan since traditional mortgage lenders require what’s called a “seasoning” period. This means you’ll need to have the loan for a certain period of time before it can be refinanced. Despite the nature of hard money loans, many real estate investors and developers use them effectively as a tool for funding their projects.