When it comes to mortgage lending, there is no one solution that fits everyone’s needs. Fortunately, there are alternatives for people who find themselves in need of a loan and unable to qualify for a conventional mortgage. If you are considering a real estate purchase, a hard money loan might work for you. The information below will shed light on this loan product.
What Is a Hard Money Loan?
A hard money loan is financing for the purchase of real estate and it’s made based on the value of your collateral, which is unlike traditional loans that focus on your ability to repay the loan. The lenders are private individuals and organizations that make decisions based on each case. Hard money lenders provide financing for different needs, but mostly for investment purposes.
There are various types of hard money loans, such as the bridge loan, which lets you buy a new property immediately, before you get the cash down payment from the sale of a property that you already own. A bridge loan is also for buying a property fast to resell or refinance it. Another example is the fix-and-flip loan, which is aptly named because it’s intended for buying a rehab property that you fix up, sell and pay the loan off. There’s also a construction loan for new construction projects, with the expectation that you will refinance or sell the property quickly.
Although less common, there’s the owner-occupied loan for consumers who don’t qualify for traditional bank loans. The reason some lenders do not fund consumer loans is because doing so requires compliance with more regulations. For instance, they would have to comply with Dodd-Frank regulations governing the debt-to-income ratio of borrowers. There are also more licensing requirements for lenders who provide consumer loans. In some states, most hard money lenders will not provide consumer loans, but there are some that will.
How Hard Money Loans Work
One of the things that makes hard money loans unique is the short loan period, which is often about 12 months. However, it is possible for the loan term to be for several years. The monthly payments for hard money loans are interest only instead of principal and interest, which makes them an attractive option, depending on your situation.
Every hard money lender will have their own set of requirements, but typically require you to put down cash based on either the Loan-To-Value (LTV) ratio or the After-Repair-Value (ARV) ratio. The loan will be paid off in a balloon payment, which includes the principal, interest and any fees required to zero out your balance.
Is a Hard Money Loan Right For You?
A hard money loan might be a good option for your situation because it could provide you with the financial resources that you need for a real estate investment. If you are unable to qualify for a traditional bank loan, a hard money loan is a good alternative. People who choose a hard money loan often do so because they can get the money quickly and there are fewer requirements. Hard money loans also have more flexible terms.
Some of the disadvantages associated with hard money loans include high interest rates, high fees and the short-term nature of the loan. You should also know that there is little oversight by the government for these loans. Additionally, they can be difficult to refinance because traditional mortgage lenders often require a certain amount of time, which they refer to as the “seasoning” period.
If you have other lending options, then you should consider them. If not, a hard money loan could work for you. This is especially true if you have a low credit score and need access to money right away.