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There are many options that people can consider when getting a mortgage, but unfortunately, there are some people that cannot get approved for a regular mortgage loan. Luckily, there are other options that they can consider. For instance, a hard money loan is a loan based on the collateral put towards the loan rather than the ability to repay the loan.
Hard money loans can be applied for by individuals, but they are usually a tool utilized for real estate investors that plan on selling the property quickly. It is important to know the terms of a hard money loan before agreeing to it. Therefore, here are a few things you should consider before getting a hard money loan.
1. What are the benefits and pitfalls of a hard money loan?
Just like everything else, there are both good and bad things about getting a hard money loan. Therefore, it is imperative to know what you are getting into before finalizing the paperwork. A few of the benefits that hard money loans provide are flexible terms, lenient requirements, and increased investment opportunities.
Unlike with large banks, lenders that provide hard money loans are individual firms or people, and this allows them to work with their clients and create custom loan options that will fit their individual situations. Plus, the requirements that most lenders require for other loans like debt, standard income, and credit scores are not a priority, because the lenders look more at what you can provide for collateral.
However, when dealing with hard money loans, you will have to also deal with things like higher fees, higher interest rates, and refinancing red tape. A lot of lenders that deal with hard money loans tend to have different fees like construction draw fees, origination fees, and even early-payment penalties that their clients are subjected too. Plus, unlike a regular mortgage loan, a hard money loan usually has a higher interest rate, because they are considered a higher-risk loan for the lender.
2. When should you consider a hard money loan and when should you not?
Hard money loans can open just as many doors as they can close. Before deciding on a hard money loan, it is imperative that you understand what you are getting into. Most hard money loans are used by real estate investors who plan on re-selling the property they are buying fast. However, there are a few instances when you should consider getting a hard money loan.
For instance, if you have a hard poor credit score, you might be denied all other types of financing, which will make a hard money loan your only option. If you are a real estate investor, time is money, and the market is constantly changing. Therefore, if you have to wait for weeks or month for other loans to come through, a hard money loan might be a good option, because it provides you with the money that you need fast, which might open other investment opportunities.
Before getting a hard money loan, it is important to know the market you are in. If you are in a buyer’s market then a hard money loan could be a horrible idea. If it comes due before you are able to sell the property, you could find yourself in a lot of trouble. If you are planning to get a hard money loan, you need to make sure you have a good refinancing plan in place, because there are a lot of requirements that some lenders require before letting you refinance a property. Overall, hard money loans have a lot of positives, but they can also be expensive and dangerous if you are not prepared. So, if you are new to real estate investment, a hard money loan should be your last resort, unless you have done your research and know what you are getting into.