About Hard Money Loans
For starters, a hard money loan is for real estate purposes. There are several different types of hard money loans that are purposed to meet the needs of real estate investors. However, there’s also a consumer hard money loan product for private properties.
An interesting aspect of hard money loans is that the lenders are private firms and individuals who look at the unique circumstances surrounding the potential borrower as opposed to just following a template or checklist of requirements. Here’s a quick look at different types of hard money loans:
Bridge loan: You might find a bridge loan beneficial if you want to buy a property now and you intend to resell or refinance it. Another use of a bridge loan is to buy a new property prior to getting cash for a down payment from a property that you already own.
Fix-and-flip loan: When it comes to fix-and-flip loans, it’s exactly as it sounds. This is an option that allows you to purchase a fixer-upper, rehab the property, resell it and then pay the loan off.
Construction loan: Real estate developers find construction loans useful if they have a new construction project and intend to refinance or sell the property as soon as possible.
Owner-occupied loan: Although less common, sometimes there is a hard money loan that allows consumers who don’t qualify for other types of financing to purchase a property for themselves.
Hard money lenders tend to steer clear of owner-occupied loans because they require adherence to more regulations, such as Dodd-Frank, which requires an assessment of the borrower’s debt-to-income ratio. The purpose is to confirm their ability to repay the loan. There are also licensing requirements involved through the National Multistate Licensing System & Registry.
Facts About Hard Money Loans
Hard money loans are shorter than traditional loans, averaging about 12 months. However, sometimes they are a little longer, but not more than a few years. Borrowers won’t usually be required to make monthly principal and interest payments, instead, they are often only required to make interest payments. There’s even a possibility that you won’t have to make any payments at all, which can make this type of loan highly attractive.
When it comes to the application process, hard money loans are quick, often taking less than a week. Instead of making a decision to fund the loan based on your ability to repay, hard money lenders focus on collateral. Borrowers will typically have to put cash down, and the amount is based on either the After-Repair-Value (ARV) ratio or the Loan-To-Value (LTV) ratio. When it’s time to pay the loan off, that happens all at once in a balloon payment that covers everything owed, including the principal, interest and all fees.
If you are still wondering whether a hard money loan is right for you, it might help to know that people who typically get hard money loans do so because they are unable to get financing anywhere else, they have bad credit or need to find a way to get money fast. You should also keep in mind that if you’re in a buyer’s market, or you already have a good refinancing plan, then a hard money loan might not be a good option. Otherwise, the advantages might outweigh the disadvantages.