There are certain situations in which a traditional mortgage lender may not be able to offer the most suitable solution. In particular, people who would like to flip houses, but do not have enough capital are likely to have more difficulty getting approved for a traditional mortgage loan. In similar cases, the borrower may consider a hard money lender. As is the case when making any other major financial decision, there are multiple considerations a borrower should make prior to choosing a hard money lender.
Hard Money Loans in Houston
Hard money loans are less popular than traditional mortgages; therefore, most people are unfamiliar that these types of loans exist. Hard money loans are asset-based loans. Lenders use the property for which the loan is approved as a hard asset and collateral. In considering whether or not to approve the applicant for the loan, hard money lenders primarily look at the borrower’s income and credit history. Hard money lenders ideally look for a credit report that reflects the borrower’s commitment to paying his or her borrowed debts back to creditors on time. Because the property the borrower uses the loan to purchase is used as collateral for the loan, lenders simply plan to recoup unpaid debt by taking the property back and selling it in the event the borrower defaults on the loan. Therefore, at the end of the day, the lender is more concerned about the value of the collateral than the borrower’s ability to pay.
Houston Hard Money Loan Approval Process
The process of getting approved for a hard money loan may feel intensive for most people. In addition to looking at the borrowers credit scores and income, lenders will also look very closely at negative items on the individual’s credit report. Not only do negative items slow down the approval process, but the lender may ultimately decide not to approve the loan. Therefore, individuals who have plenty of income and satisfactory credit scores may wish to avoid pursuing hard money if they have past negative entries on their credit profile.
Advantages to Choosing a Hard Money Loan
Because hard money loans have a higher interest rate than a traditional mortgage loan, most borrowers intend to utilize the loan for no more than 6 to 24 months before paying it back in full. Most hard money loans are available for terms ranging from one year up to five years. One of the major advantages of choosing this type of loan is having the ability to close in a much shorter period of time, which in some cases may be a matter of days. Hard money lenders are generally more flexible than traditional mortgage lenders. Therefore, under certain circumstances, the borrower and the lender may be able to work together to tweak certain aspects of the lending process such as the repayment schedule. A traditional lender, on the other hand, is more likely to be bound by strict corporate policies.
Who Should Apply for a Hard Money Loan?
Although hard money lenders place more of an emphasis on the value of the collateral than the borrower’s ability to pay, there are still some stipulations that generally make some people better candidates for these loans than others. Hard money lenders tend to keep loan-to-value ratios at a maximum of 50 to 70 percent. Therefore, applicants generally need to have assets in order to qualify. Although people who fix and flip properties most often use hard money loans, it is possible to use this type of loan to purchase a property for long-term, traditional residential purposes. However, people who obtain a hard money loan for a home they wish to live in for years should refinance as quickly as possible to obtain a more favorable interest rate.
There are several advantages to obtaining a hard money loan, particularly for people who are looking to invest in buying and selling real estate within short periods of time. A hard money lender can provide more information about application requirements and the approval process.
The real estate market in Houston is hot, so it makes sense to jump in and take advantage of the tremendous money-making opportunities that are currently available. While some of the investment scenarios are traditional and are well-suited for bank financing, numerous lucrative opportunities require a more creative approach. Financing a real estate investment enables you to leverage your purchase, and this is one of the great benefits of this type of investing. However, not all financing scenarios are the same, and traditional real estate loans are not right for every borrower or for every property. With this in mind, it makes sense to take a closer look at what hard money loans are and how they work. By doing so, you will have a better idea about when applying for a hard money loan from Delancey Street makes sense.
How Hard Money Loans Work
A hard money loan is an alternative to traditional real estate financing. When you apply for a traditional real estate loan, the underwriting team looks at your financial ability to repay the loan. This means that your credit rating, income versus expenses and liquid assets are less significant than the value of the real estate and the overall merits of the transaction. Hard money loans are commonly used as bridge or interim loans, which means that they are short-term loans that are used to reposition the property until it can be sold or until it qualifies for a traditional bank loan. They are also used for construction loans, fix-and-flip scenarios and even owner-occupied loans when the borrower lacks qualifications required for a traditional real estate loan.
The Benefits of a Hard Money Loan
Before deciding if you should apply for a hard money loan for an investment in Houston, take time to explore the many benefits associated with this type of loan. A hard money loan usually has a short term, which may range between 12 and 36 months in many cases. In addition, you may be able to set up an interest-only loan or a loan with a balloon payment. This can create very affordable monthly payments. Furthermore, lending requirements are usually straightforward and may be much less tedious to meet than traditional real estate loan requirements. Another important benefit of a hard money loan is that the processing and underwriting timelines are much shorter. In fact, you may be able to close on a hard money loan within a week or two in some instances. Your hard money lender may also be more lenient and flexible with regards to loan terms than a bank may be. As you can see, there are numerous benefits of a hard money loan, but you will need to analyze your situation carefully in order to determine if applying for hard money financing is the right move for you to make right now.
When to Use a Hard Money Loan
Because of the unique features and benefits associated with a hard money loan, they are often used in specific types of lending scenarios. For example, many people use them as construction loans. They are also used when incredible investment opportunities are available and when a quick closing is required. A hard money loan is most commonly used when traditional financing is not available. This may be because the property or the borrower will not qualify. Before applying for a hard money loan, keep in mind that this is short-term financing. You should have a realistic plan to sell or refinance the property before the hard money loan’s term expires.
Delancey Street is your trusted source for hard money loans in Houston and throughout the area. To inquire about loan terms that may be available for your scenario, contact us today.
The Good and the Bad of Hard Money Loans
It would be good if a single mortgage loan existed that fit everyone’s individual situation. That is just not reality. The desired real estate loan may require someone getting money as soon as possible. Conventional mortgages are not able to be obtained by individuals who don’t qualify for them. It is possible the answer to many real estate problems could be hard money loans.
Type Of Real Estate Loan
A hard money loan is a form of real estate loan. They are based on the value of a person’s collateral. This could be the property itself. It is not based on an individual’s ability to pay. There are various types of hard money loans.
*Construction Loan – These loans are designed for a real estate developer to have the ability to quickly start on a new construction project. The goal of this loan is selling the property quickly or refinancing the loan.
*Bridge Loan – These are designed to help an individual purchase property quickly with the goal of selling the property or refinancing it. This can also be used when a person wants to buy a new property but doesn’t have enough cash for a down payment from selling the property they currently own.
*Owner-Occupied Loan – This loan makes it possible for a person who doesn’t qualify for any other type of financing to buy real estate for themselves.
*Fix And Flip Loan – These loans enable a person to purchase a rehab property and quickly fix it. The goal is then to resell the property and pay off the loan.
*Other – Hard money lenders are often private firms and individuals. They consider loans on a case-by-case basis. These private firms and individuals will consider lending money for many different reasons.
How Hard Money Loans Work
They are not loans available to everybody. Most hard money lenders do not give hard money loans for non-investment situations. If someone believes they can use a hard money loan to purchase their private home, it may not be possible. Hard money loans are only provided for a short amount of time. It most cases, it must be paid in a few years and many have a 12-month term. Hard money loans provide those who use them with a variety of advantages. They provide fast financing, short loan term lengths, and a simplified application process.
Payment Of Hard Money Loan
Someone wanting a hard money loan will need to have some of their own money to start the process. In each situation, a lender will require a certain amount of cash based on either After Repair-Value (ARV) or Loan-To-Value (LTV). A hard money loan is paid off in one giant balloon payment at the end of the loan term. This covers all of the loan principal as well as fees associated with the loan and interest.
Disadvantages Of Hard Money Loans
There are a lot of advantages that come with a hard money loan and also disadvantages that should be considered.
*Refinancing Red Tape – Many traditional mortgage lenders may require an individual to own a property for a specified length of time before being permitted to refinance. This can be a problem for individuals if their hard money loan is due prior to being able to refinance another loan.
*High-Interest Rates – The interest rates for hard money loans are commonly double digits. This is because hard money loans are usually designed to be paid off within three years. They are not meant to be paid over a period of 30 years.
Short Terms – A hard money loan will come with a short payback period. This means the payback options could be to apply for a loan extension, sell a property prior to the loan being due or refinance into a traditional mortgage.
Lack Of Oversight – When it comes to hard money loans, there is very little oversight by the government. This is why it is essential a person completely understand all aspects of a hard money loan before getting one. An unscrupulous lender could cause someone a lot of problems.
High Fees – A hard money loan will come with high-interest rates but lenders often charge a variety of fees. This could include underwriting fees, origination fees, construction draw fees and more.
A hard money loan is something that can be a huge help in certain circumstances. If someone believes they could benefit from a hard money loan, they should contact local real estate investors. Lender reputations are known in the real estate investor community. Experienced investors can mention good hard money lenders and can also suggest which ones need to be avoided.