About Hard Money Loans
Instead of your ability to repay, hard money loans are made based on the value of your property because it serves as collateral. While your financial standing isn’t altogether insignificant, it’s far less important to hard money lenders than it is to traditional mortgage lenders. Hard money lenders take a different approach during the lending process too. They tend to look at each individual situation as opposed to simply following a template of requirements.
Real estate investors have a wide range of needs when it comes to loan products. Some of the common types of hard money loans are construction, bridge, fix-and-flip and owner-occupied. Real estate developers have the benefit of a construction loan that can be used to start a new construction project and either quickly sell it or refinance. A bridge loan lets you buy a property and then refinance or resell it. With a bridge loan, you can also buy a new property before you get the cash down payment from the sale of a property in your portfolio. A fix-and-flip loan is for buying, fixing and then flipping a property, at which point you will pay off the loan.
Unlike the other products mentioned, there is an owner-occupied loan that’s uncommon and only a small percentage of hard money lenders offer them. It’s because owner-occupied consumer loans are highly regulated and complicated. However, there is still a chance that you can find a hard money lender that offers this product to individuals who plan to live in the property, but are unable to secure a traditional mortgage.
How Hard Money Loans Work
One of the biggest benefits of hard money loans is the easy application process that is free of hassle and boasts a turnaround time of just days. That’s definitely a perk to real estate investors. You are generally required to have a cash down payment that depends on your property’s Loan-To-Value (LTV) ratio or After-Repair-Value (ARV) ratio.
The term for hard money loans is just a few years, but typically one year. Instead of making the usual principal and interest monthly payments, there’s a chance that you will only need to make monthly interest payments. There’s also a chance that you won’t have to make any payments until the maturity date, at which point you will make a balloon payment. The balloon payment includes the principal, any remaining interest and all fees.
Is a Hard Money Loan Right for You?
When it comes to the benefits of hard money loans, it’s clear. They offer quick money, relaxed requirements and flexible terms. Specifically, you could apply for a loan and receive funding in less than a week. There’s a chance that your loan could be approved with low credit scores and other issues. The bottom line is that you will have access to financial resources, which can increase your investment portfolio.
On the opposite end of the spectrum are the aspects of hard money loans that require due diligence in making a decision. Simply put, the interest rates are high, there are often a lot of fees, and the terms are short. Due to the minimal government oversight, you’ll need to be cautious about choosing a lender. You might also have an issue with refinancing before the “seasoning” period required by traditional lenders. Nevertheless, when all of the pros and cons are weighed, many investors decide that hard money loans are a valuable tool.