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When buying real estate, most people believe the only source of financing is a mortgage obtained at a bank. While this is used for the vast majority of real estate purchases, there are other sources of financing, one of which is hard money loans. While these loans offer large amounts of money much faster, they do differ substantially from traditional bank loans in terms of payback periods, interest rates, collateral requirements, and many other areas. Because of this, investors seeking out these loans should do their homework about the differences in these loans before making their final decision.
Are There Different Types of Hard Money Loans?
When it comes to hard money loans, one of the biggest advantages to investors is the various types of projects and purchases for which these loans can be used. As an example, many lenders will work with investors who want to purchase flip-and-fix properties, since these properties can often be bought fast, repaired quickly, then sold at a substantial profit, which leads to the loan being paid off on time. For other investors, they will use their loans for construction projects or as bridge loans, which are loans enabling them to get the cash needed for a purchase before the final sale of a property they currently own. Since there is so much flexibility associated with these loans, lenders are able to consider each investor’s plans on a case-by-case basis.
How are Hard Money Loan Payments Structured?
Once an investor accepts a hard money loan, the payment structure will be very different from a traditional mortgage. One of the biggest differences will be the payback period, which will probably be from only one to three years, depending on the lender and the amount of the loan. Along with this, the loan will have interest-only payments, and feature a balloon payment as the final payment. Since these loans have very high interest rates and numerous fees associated with them, the balloon payment can be very substantial. Because of this, the investor should have a solid plan in place to ensure the property they purchase can be sold within the payback period. Otherwise, they could lose the property to the lender in foreclosure proceedings.
Easy Applications and Approvals
Rather that subject themselves to the complex application process associated with mortgages, investors choosing hard money loans can find the application and approval process much easier. Since these loans have few regulations associated with them, lenders have much more flexibility in deciding whether or not to grant the loan. Along with this, since the lender will be using the property as collateral for the loan, they do not have to worry about the investor’s ability to repay the loan, resulting in them not having to spend time doing credit checks and other aspects of traditional loan approval.
What if the Property Purchased Doesn’t Sell in Time?
Even with the most seasoned investors, there comes a time when a property that is purchased does not sell before the hard money loan must be paid back in full. In these cases, a variety of options exist. For instance, the investor can apply for a loan extension, but this usually carries higher interest rates and penalties. Another option is refinancing the property into a traditional mortgage, or in the worst-case scenario cutting their losses and allowing the lender to foreclose on the property. To ensure none of these situations develop, investors should carefully do their homework about these loans, and always be sure they have a plan in place that virtually assures them of the property selling in a short period of time.
By going into hard money loans knowing all the facts, investors can use these unique short-term financing options in creative and profitable ways.
If you’re planning on getting a hard money loan for the first time, you probably have a lot of questions that you need answered before you take the plunge. Hard money loans can be excellent investment tools for people looking to invest in real estate, but you need to know exactly how they work in order to benefit from them in the right way.
What exactly is a hard money loan?
A hard money loan is a short-term real estate loan given to investors who are looking to fund short-term real estate purchases. They’re supplied by individuals and organizations instead of by banks the way that traditional loans are supplied. Investors like hard money loans because they have looser lending criteria than traditional loans, making them ideal for people who’ve had credit issues in the past. Once you’re approved, you usually get your money is as little as a week, often sooner, making these loans the perfect option for people who need to get money fast in order to participate in fast-moving real estate deals.
It should be noted that hard money loans have higher interest rates than other types of loans due to the fact that the loans that they’re underwriting are riskier. Hard money lenders usually let borrowers make interest-only payment or no payments at all until the loan comes due at the end of the term via a single balloon payment. If you haven’t been making any payments all along, keep the high interest rates in mind as you prepare to write your check.
Common Questions From Potential Borrowers
Given the information above, many people still have questions regarding hard money loans. Some of those questions are below:
What types of people use hard money loans?
Hard money loans are primarily for real estate Investors who are looking to get quick access to funding for short-term real estate purchases. This list of investors includes developers, construction companies, fix-and-flippers, and buy-and-hold investors. They seek out these loans because they get access to the money quickly, allowing them to participate in fast-moving real estate deals.
How long are the loan periods for hard money loans?
Hard money loans are short-term loans, ranging anywhere from as little as six months in duration to as long as three years. They work for real estate investors because the investors usually plan to buy, fix and sell a property in a short period of time. Once the loan period is complete, the property should have been fixed and sold and the loan repaid.
What’s the difference between loan-to-value ratio (LTV) and after-repair-value (ARV) when it comes to hard money loans?
The loan-to-value ratio (LTV) is the amount of money that the lender will loan you on the property that you’re looking to purchase. That number is figured by the ratio of the loan amount and the overall current value of the property. Hard lenders generally extend anywhere between 65 percent and 75 percent of a property’s value to borrowers.
Some hard money lenders extend loans based on the ARV, or after-repair-value, of the property. The ARV represents how much the property will be worth once the repairs have been done. Lenders that loan based on the ARV usually loan anywhere between 55 percent and 70 percent of the property value. Check with the hard money lender you’re interested in to find what type of loan would be avaiable t you.
What type of business plan do you need to show a hard money lender?
Like any lender, a hard money lender needs to be sure that you’re going to be able to pay the loan back when the loan period is up. Prepare a business plan that details exactly how you’re going to get it done. Hard money lenders assume that you’re going to pay the money back when your investment property has sold. Lay that out in your plan, and also come up with a contingency plan in case the property sale doesn’t happen in time.[flexy_breadcrumb]