There is no such thing as a one-size-fits-all mortgage. A lot of people find that they are cannot qualify for a normal mortgage loan, and hard money loans are one way that these individuals can get around mortgage problems. However, are they right for you? Here are a few things to consider before going with a hard money loan.
Understanding Hard Money Loans
What is a hard money loan? The basis behind a hard money loan is that it is based off the collateral you are able to offer, usually the land itself, rather than the ability to be able to repay the loans. There are different types of hard money loans:
- Own-occupied loan – Used by individuals who cannot get other types of financing to purchase a property.
- Fix-and-flip loan – Basically, individuals purchase a property, fix it up, and sell it quickly.
- Construction loan – Used by real estate developers to begin new construction projects
- Bridge loan – Used to allow individuals to purchase a property with the idea of reselling or refinancing it quickly.
Unfortunately, hard money loans are not available to everyone. Lenders generally do not give them to those intending on a noninvestment purpose. People who are looking to purchase a private home, are usually not approved for a hard money loan. They are reserved for those that are investing in property with the intent to sell it quickly. Hard money loans and traditional bank loans are completely different, even though they are both used to buy property.
Should You Use a Hard Money Loans?
Before determining if you should use a hard money loan, you need to understand the benefits and pitfalls of this type of loan.
Some of the benefits of hard money loans include:
- Flexible terms – Lenders generally will create custom loans to fit individual situations due to it being private individuals and firms.
- Quick money – In some cases, real estate investors can get approved for funding in a week or less, as opposed to months through traditional lending.
- Increased investment opportunities – Due to the speed they can get this type of loan, it can increase the probability of getting a better real estate investment.
- Lenient requirements – Hard money lenders are more interested in the collateral used to get the loan, rather than income, credit scores, and debt.
Some of the pitfalls of money loans include:
- Refiniancing red tape – Some lenders require that you have had the property for a certain length of time before refinancing a property.
- Short terms – Hard money loans come with short payback periods, generally a year or two.
- High-interest rates – Most hard money loans come with double-digit interest rates.
- High fees – On top of high-interest rates, most lenders require number of fees, as well.
A few times you should consider a hard money loan are:
- Need fast money – An investment you are interested in cannot wait for a regular loan time.
- Poor credit score – Can’t get a loan because you have a low credit score.
- No other options – You can’t qualify for other types of loans.
A few times you should avoid hard money loans are:
- Have other options – Hard money loans should be a last resort.
- Buyer’s market – If homes are not selling in your market, a hard money loan should be avoided.