Des Moines-Iowa Hard Money Loans
When an investor needs to obtain a loan for a property, time is money. However, if they are using a bank to secure a traditional mortgage, time may feel as if it is moving in slow motion. Since this process can take weeks to complete, there is a chance that if the loan is approved, another investor will have already purchased the property. To keep this from occurring and make sure they gain the money needed as quickly as possible, many investors turn to hard money loans. Featuring easy application processes, a lack of emphasis on past financial problems and the applicant’s ability to repay, and flexibility to be used on different projects, hard money loans sound like the perfect solution. However, while they offer numerous benefits, they also have many areas that can be problematic if careful planning is not used along the way.
How Can Investors Use Hard Money Loans?
For investors, securing a hard money loan offers them the ability to use it on many different types of real estate investments. For many investors, these loans are great for fix-and-flip properties, since they can secure quick financing, repair the properties, then sell them at a profit that will also pay off the loan. For other investors, the loan may be used to help start a construction project much faster than anticipated. However, it is important to note that in the majority of situations, hard money loans are not given to those seeking to purchase owner-occupied properties.
What Kind of Collateral is Required?
Like any type of loan, the applicant must have collateral to offer as security in case they cannot repay the loan. In situations involving hard money loans, the collateral required is not cash or other assets, but rather the property the investor wishes to purchase. Depending on the value of the property, the lender will make an offer to the investor, usually equal to 80-90 percent of the property’s value. Thus, if the property the investor wishes to purchase is valued at $100,000, the hard money loan lender will likely offer $80,000-$90,000, which will be based upon the property’s loan-to-repair value ratio or after-repair-value ratio. So while the investor will receive most of the money needed for the purchase, they will also need thousands of dollars of their own money to complete the purchase.
Easy Application Process
When applying for a mortgage, applicants must provide detailed information about their credit history and other aspects of their finances. But with a hard money loan, none of this matters to the lender. Instead, the lender knows that if they provide the loan, they come out a winner no matter what. Whether the loan is paid back in full, refinanced, or the lender forecloses on the property, they will recoup their money under any of these circumstances.
Hard Money Loan Terms
If an investor pursues a hard money loan, they should be aware the terms may be very different than any loan they have used in the past. For starters, the payback period will be very short, probably only 12 months. Along with this, interest rates will likely be in the double-digits, leading to much more interest being paid on this loan than traditional loans. Finally, a number of fees are usually added to these loans, such as origination fees, underwriting fees, and fees for penalties if the loan is paid back early. And when the final payment comes due, it will be in the form of a balloon payment, so investors should be prepared for this as well.
By using careful planning from start to finish, investors who choose to rely on hard money loans can find themselves able to complete a variety of projects and purchases much faster than anticipated.