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A hard money loan refers to a real estate loan type that is approved based on the collateral value as opposed your capacity to repay. There are various types of hard money loans. One such loan is a bridge loan that is meant to allow someone to purchase a property fast with the aim of refinancing or reselling it. Also, they can allow you to purchase a new property now before you obtain sufficient money for a deposit from the sale of a property you currently own.
Another type of hard money loans is a fix-and-flip loan that lets you purchase a rehab property before fixing it up fast in order to resell it and clear the loan. When it comes to an owner-occupied loan, you are allowed to buy a property for yourself if you fail to qualify for other financing types. With a construction loan, you can rapidly start a new building project, with the aim of reselling or refinancing it quickly.
How Hard Money Loans Work
Hard money loans are not available to all people. The majority of lenders will not offer hard loans for personal purposes. For instance, if you are hoping to get a hard money loan to buy a new home, it won’t work out. If a lender offers a hard money loan to a consumer for noninvestment purposes, they could face regulatory problems.
The repayment period for these loans is usually short, usually below few years and even one year. As opposed to making periodical repayments toward the loan, the majority of the hard money loans will only need you to repay interest only, or possibly zero payments. The principal is paid as a lump sum at the end of the period. Hard money loans have numerous advantages that are appealing to real estate investors. These include quick financing, straightforward application process, and short repayment period.
Benefits of Hard Money Loans
As opposed to taking weeks or months filling out forms and calling people to get a loan, you can apply for a hard money loan and get financed within a week or less. Second, hard money loans have lenient requirements. Normal mortgages need a particular standard of credit scores, debt, and income. Hard money loans also look for these requirements. However, the principal requirement is collateral, and if you have a property, you will get the loan.
Third, hard money loans have flexible terms. Since you are dealing with private firms and individuals as opposed to banks, there is a higher likelihood that lenders will make custom loans that suit your needs. Fourth, there is an increase in investment opportunities when it comes to hard money loans. Gaining access to a lot of money in a short period means that you will not miss urgent investment opportunities.
Drawbacks of Hard Money Loans
First, these type of loans have high interest rates. Hard money loan interest rates usually float toward double digits. Second, hard money loans do not have oversight. In comparison to traditional consumer mortgages, hard money loans face minimal government oversight, particularly when the loans are for business purposes. That is why it is critical to ensure you really need it before application.
Third, you will experience high fees with this type of loan. Many lenders charge various fees like origination fees, construction draw fees, early payment penalties, or underwriting fees. Fourth, the loan faces short terms. With this loan, you will be required to repay within a short period, usually as short as a year. You will have to sell the property prior to the due date, refinance into a traditional mortgage, or applying for an extension. Fifth, there is a lot of red tape when it comes to refinancing. Some lenders will need you to own the property for a certain period before you can be refinanced. This can be problematic if your hard money loan is due and you have not met this requirement.