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Dallas Hard Money Loans
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Did you know that mortgages are not the only kind of loans that can be used to finance the purchase of residential or commercial real estate? There is another kind of loan known as a hard money loan that can finance a property purchase quicker than a traditional mortgage, but should you use one? That could depend on factors such as what kind of property you intend to purchase, what you intend to do with the property, and how quickly you can repay a hard money loan. But what exactly are Dallas hard money loans based on and where do you get them?
Hard Money Loans Emphasize The Value Of The Property To Be Used As Collateral
While both traditional mortgages and hard money loans are secured loans, which are secured by the property you are purchasing, mortgages often are approved based on the borrower’s income, credit history, past foreclosures or defaults, or other extensive background checks. Hard money loans on the other hand, are based more on the value of the property used to secure them. Yes, your credit and income does matter and will be checked, but you won’t be rejected for a hard money loan simply because you have a blemish on your credit report.
Hard Money Loans Are Meant To Be Used For Short-term Projects
Usually the idea behind a hard money loan is to buy and flip a property, or to turn it into a rental unit within a short period of time. For that reason, hard money loans usually come with short terms of about six months to two years, though occasionally you can get them for longer. They also usually have higher interest rates than mortgages because they are shorter in term and lenders usually are taking on more risk by loaning to borrowers who may not have the greatest credit or income situation. Hence getting quick returns on your investment are usually very important so you don’t get caught in an extended debt situation or forfeit the property to the lender.
Hard Money Lenders Are Usually Investors Or Other Non-Bank Institutions
So who exactly can you get a hard money loan from? Usually you can find them at various investment firms that deal specifically in real estate, mortgage brokers, or other alternative lenders who might have interests in real estate and can afford risks. Usually what the lender will do is conduct a thorough review of the property to be purchased and make the loan based on a loan-to-value ratio.
Specific Hard Money Loans For Projects
Besides the acquisition loans that are usually used for directly buying properties for fixing and flipping, there are other hard money loans like construction loans and bridge loans. Construction loans are usually used specifically by contractors or those undertaking construction projects that need just a little more time to complete than basic home flipping. Bridge loans are somewhat similar to second mortgages or home equity loans because they are taken out against properties already owned in order to get funding until a property is sold off.
Applying For A Hard Money Loan
If you want financing that can be done quickly and believe you have a favorable situation to repay a loan, you may want to make sure you have your documents ready to show the lender. Generally what they’ll want to see statements of your bank account, your monthly income amount, details on the property you’re looking to purchase and sometimes a few other financial documents for good measure. But usually the lender will make a decision to fund your property investment within days, so you won’t have to be kept in limbo for extended periods hoping for approval and waiting to see funds in your account.
In some situations, a real estate investor may need money as fast as possible to finalize the purchase of a prime piece of property. Whether this is due to not qualifying for a traditional mortgage or simply because they are trying to keep other investors from beating them to the property, it may appear there are few options available. However, for many investors, this means using a hard money loan. Quite different from a regular mortgage, hard money loans offer large amounts of money in days instead of weeks. Along with this, they also provide the flexibility investors seek when pursuing various investment projects. But while having these benefits, these loans also come with higher interest rates, fees, and short payback periods. Therefore, before choosing to take a hard money loan, it is best to be aware of a variety of details.
Since this is a loan, the investor will need to have collateral as they would at a bank. However, with hard money loans, the property being purchased serves as the collateral, and is key in determining how much money the investor can get. To make this determination, the lender will look at two main aspects of the property, these being the loan-to-value ratio and after-repair-value ratio. Based on how they view these two aspects of the property, the lender will lend an amount equivalent to a large percentage of the value, often 80-90 percent. Thus, if the property is valued at $100,000, the investor will be granted a loan of up to $90,000.
Once an investor is granted a hard money loan, the pressure will be on to be sure it can be paid back in a much shorter period of time than a traditional mortgage. This is because instead of having up to 30 years to pay off the loan, the investor will probably have no more than three years to pay off their hard money loan, and in most cases the payback period will be only 12 months. Because of this, it is always recommended the investor have a sound financial plan in place to ensure their property sells within this time. If for any reason it does not, they may be forced to refinance their loan at a much higher interest rate, incur additional fees, or possibly face foreclosure from the lender.
Application and Approval
While there are drawbacks to hard money loans such as the short payback period and higher interest rates, one of the biggest benefits is the easy application and approval process. Since the lender will either have their loan paid off or be able to assume ownership of the property, they do not have to worry about the investor’s ability to repay the loan. Thus, they rarely if ever check the investor’s past financial history, which may include bad credit or bankruptcies. Along with this, rather than wait weeks for their loan application to be approved, investors working with hard money loan lenders will often have their applications approved in less than one week, allowing them to have cash in hand much sooner than with traditional loans.
Finding a Reputable Lender
Unlike banks that must follow strict lending regulations, hard money loan lenders have few regulations that they must follow. Because of this, it is very important for investors to make sure they are dealing with a reputable lender when pursuing a loan. To make sure a reputable lender is selected, an investor should ask other investors they know to point them in the direction of a reputable lender, which will be either a private institution or individual. By asking other investors or real estate professionals in their area, there should be little problem finding a reputable lender with whom to do business.