If you find yourself in need of a loan for the purpose of buying real estate and you’ve run into problems, there’s a solution. Hard money loans provide real estate investors an alternative when a traditional mortgage loan doesn’t work out. This is not an uncommon situation – it happens all of the time. In fact, it’s possible to have all of your ducks in a row, good credit and all, yet still not qualify for a bank loan. Hard money loans are asset-based and short-term. Keep reading to learn more about this loan product.
About Hard Money Loans
Traditional mortgage loans primarily assess your credit scores and income to gauge your ability to repay the loan. Hard money loans are different because the key factor is the value of your property as collateral. Hard money lenders are investment firms and individual investors. They use a different approach to lending that involves assessing applications on a case-by-case basis. Hard money lenders are far more lenient and are often willing to forgive poor credit, bankruptcies and foreclosures. They assess the individual’s situation instead of just following a strict list of requirements.
There are a variety of different hard money loan types, such as the fix-and-flip loan, bridge loan, construction loan and owner-occupied loan. The owner-occupied loan is far less common because hard money lenders shy away from the regulatory nightmare that owner-occupied consumer loans can create. Providing these loans can result in compliance requirements that would not exist otherwise. If you’re interested in this type of loan, there’s hope because about 10 percent of hard money lenders still offer them in some states.
A fix-and-flip loan is for the purpose of buying, fixing up and reselling a property, at which point you’ll pay off the loan. New construction loans enable real estate developers to start a new project and either refinance or sell the property right away. Bridge loans enable you to buy a new property before you get the cash down payment from selling a property that you already own. A bridge loan also allows you to buy a property fast, then refinance or resell it.
How Hard Money Loans Work
There are several reasons why a real estate investor would be interested in a hard money loan. For starters, the application process is streamlined and couldn’t be easier. Additionally, the turnaround time can be less than a week. Depending on the lender, there’s a chance that you could apply for a loan on Monday and receive funding by Friday, if not sooner. There’s also the unfortunate issue of not qualifying for a traditional mortgage because the decision was based on stringent requirements that leave little room for considering special circumstances.
Typically, borrowers must put cash down on a hard money loan and the amount required is based on the Loan-To-Value (LTV) ratio or the After-Repair-Value (ARV) ratio. Instead of monthly principal and interest payments, there’s a chance that you will only have to make interest payments. There are even some loans that don’t require any payments until the loan maturity date. Just keep in mind that every lender is different and has their own criteria. When the loan matures, a balloon payment settles the balance and includes the principal, all remaining interest and any fees that have been added to the loan.
Is a Hard Money Loan a Good Alternative?
Everyone’s situation is different, which means determining whether a hard money loan is right for you requires an assessment of your needs. People often choose hard money loans because they are unable to find a less expense product, have a poor credit score or need money fast. There’s often a strategic decision to move forward with a hard money loan despite the realization that hard money loans have high interest rates, short terms and a lot of fees. Why? Because access to money can be the difference between success or failure as a real estate investor.