Hard money loans have become a solution to a problem that many real estate investors face. The information below about hard money loans is provided so that you can get a good understanding of this loan product.
About Hard Money Loans
For starters, hard money loans are real estate loans and the lenders are private companies and individuals. Hard money lenders make funding decisions based on the merits of each borrower, as opposed to strict, one-size-fits-all lending requirements. For instance, while conventional loans primarily evaluate your ability to pay, hard money lenders assess the value of your collateral.
There are different kinds of hard money loans. For instance, a bridge loan will let you buy a property fast, then refinance or resell it. You can also use this loan to buy a new property before getting the cash down payment from the sale of a property you already own. Fix-and-flip loans are just as they sound; you buy and fix up a property to sell immediately, and pay the loan off. Construction loans are for new construction projects when the property will be sold or refinanced.
There’s also the owner-occupied loan for consumers who want to purchase a property that they occupy, but are unable to qualify for other types of loans. However, a lot of hard money lenders do not provide these loans because they can become complicated due to regulations. For instance, owner-occupied consumer loans require compliance with the Dodd–Frank Wall Street Reform and Consumer Protection Act. There are also licensing requirements for this type of loan. These regulations make an otherwise easy hard money loan process far more complicated.
How Hard Money Loans Work
The application process for hard money loans can often be completed within a week. Usually, you will need cash for the loan, and the amount will depend on the property’s Loan-To-Value (LTV) ratio or After-Repair-Value (ARV) ratio. Once funded, the loan period is usually about 12 months to a couple of years. A beneficial aspect of hard money loans is that you will not have to make monthly principal and interest payments. Instead, you will make interest only payments. At the end of the term, you will pay the entire loan off through a balloon payment that covers the principal, the rest of the interest and all fees.
How Hard Money Loans Are Different
There are stark differences between hard money loans and traditional loans. Although they sometimes have similar underwriting practices and they both offer mortgage loans, just about every other aspect of these products are different. The lending process for hard money loans is fast, the terms are flexible and the requirements are less stringent. These are all benefits that could outweigh other aspects of hard money loans that are viewed less favorably.
What’s often considered a downside of hard money loans is that interest rates are high, the loan period is short, there are a lot of fees, there’s a lack of government oversight and you could possibly have a difficult time refinancing if you are still in the “seasoning” period of the loan. Despite these considerations, hard money loans are still a useful tool for people who cannot qualify for other types of loans.
Many real estate investors who weigh the pros and cons, choose a hard money loan because it makes sense from a strategic standpoint. However, it might be a different story if it’s a buyer’s market or other options are available.