Obtaining a loan to purchase property isn’t always easy. Quite frankly, sometimes rigid lending requirements make it difficult for some people to quality. When money is needed right away to purchase real estate, there are other options.
Hard money loans offer financing that’s asset-based and for a much shorter duration than bank mortgage products. While it would be good if it there wasn’t a need for an alternative solution, life isn’t always that easy. Below you’ll find information that offers insights into hard money loans.
About Hard Money Loans
Hard money loans are made primarily based on the value of your collateral instead of other factors, such as your ability to repay the loan. Hard money lenders are typically private firms and individuals who have the autonomy to assess the merits of your loan application as opposed to simply following a list of strict requirements. Essentially, there’s a greater chance of getting approved because lenders can offer a custom loan product that fits your needs.
There are different kinds of hard money loans. Some of the common types include are the construction loan, bridge loan, fix-and-flip loan and owner-occupied loan. However, owner-occupied loans are the least common because they can create a regulatory nightmare for lenders, such as a requirement to comply with Dodd-Frank and obtain specific licensing. Nevertheless, there are still some hard money lenders who offer owner-occupied consumer loans.
Construction loans are provided to real estate developers for new construction projects when they intend to refinance or sell right away. Bridge loans let you buy a property fast, then refinance or sell it. You can also buy a new property prior to getting the cash for a down payment from the sale of a property that you presently own. The aptly named fix-and-flip loan is for fixer-uppers that you plan to sell, then pay the loan off.
A Closer Look at Hard Money Loans
There are aspects of hard money loans that appeal to real estate investors, such as the fast financing that can sometimes take less than a week. The application process tends to be streamlined and free of the usually hassles. Hard money lenders will often require you to put cash down that’s based on your property’s Loan-To-Value (LTV) ratio or the After-Repair-Value (ARV) ratio.
As far as the actually term of the loan, it’s often 12 months, but can be a couple of years. Every hard money lender is different. Instead of making principal and interest payments, you will often be required to make interest only payments. There are even some instances when no payments are required until the end of the loan when you make the balloon payment. The balloon payment will be comprised of the principal, any remaining interest and all fees.
Is a Hard Money Loan Right for You?
Hard money loans have few similarities with traditional bank loans. Whether a hard money loan is a good choice for you depends on your situation. The first consideration is whether you are able to get another type of loan. If not, then you’ll have to weigh the pros and cons of a hard money loan.
If you’re looking for reasons not to get a hard money loan, there are plenty. The interest rates are high, the terms are short, sometimes there are hidden fees, and there is little government oversight. It can also be difficult to refinance this type of loan because of traditional mortgage lending requirements.
On the flip side, if you are looking for reasons to get a hard money loan, there are several. You will have access to quick money, the terms are flexible and the requirements are lenient. If you are in need of money and you have don’t have another options, then a hard money loan might be a tool that you can use.