If you’re in need of a mortgage loan and you have had difficulties securing a traditional bank loan, there are other options for you to consider. It’s not uncommon for real estate investors to encounter difficulties with financing, which is why hard money loans are an alternative that works well for some people.
Hard money loans are for the purpose of real estate investing and the lenders are private individuals and firms. These types of loans offer benefits that you might not find elsewhere. The information below provides useful information that can help you make a decision about whether a hard money loan will work for you.
About Hard Money Loans
Most mortgage lenders assess your ability to repay the loan during the application process. This isn’t necessarily the case with hard money loans. Since it’s a real estate loan, the focus is on the collateral, and funding decisions are made based on each unique situation. There are various types of hard money loans, such as fix-and-flip, bridge, owner-occupied and construction loans.
While owner-occupied loans are less common because they are for the purpose of buying a private property, the others referenced above are very common. The fix-and-flip loan is a good option if you want to buy and rehab a property fast to resell it, then pay the loan off. The bridge loan is unique because you can buy a property fast, then resell or refinance it. You can also buy a property before getting the down payment from selling a property that you already own with a bridge loan. There are also new construction loans for the purpose of refinancing or selling a property.
One of the reasons why fewer hard money lenders provide consumer loans for private properties is because there would be additional regulations, such as the Dodd–Frank Wall Street Reform and Consumer Protection Act and licensing requirements with the National Multistate Licensing System & Registry. It would complicate what is often a streamlined process.
The term for hard money loans is usually less than a few years, and often about 12 months. Instead of making monthly payments comprised of the principal and interest, you would make interest-only payments. In some cases, you are not required to make any payments for the duration of the loan. No doubt, this is an attractive feature of hard money loans.
The application process for hard money loans is usually less than a week. Generally, you will need to put cash down and the amount is based on the property’s Loan-To-Value (LTV) ratio or After-Repair-Value (ARV) ratio. Hard money loans have a balloon payment that includes the principal, interest and fees.
How Hard Money Loans Are Different
While hard money loans and certain bank loans are similar in that they provide a resource for buying property, the differences are significant. A bank mortgage considers your credit rating and income, but hard money lenders are more concerned with collateral. In fact, hard money lenders will even consider funding a loan when there is a bankruptcy, foreclosure and bad credit. Perhaps one of the most significant differences is that the term for hard money loans is very short.
The Pros and Cons of Hard Money Loans
If you are trying to ascertain whether a hard money loan is a good choice for you, then you’ll want to consider the pros and cons. Hard money loans are beneficial because you can get the money that you need in a short amount of time. Further, the requirements are lenient, so you won’t have to worry much about your credit score and other issues.
The issues that some people have with hard money loans is that they often have high interest rates, high fees and very short terms. Refinancing can also present challenges because of traditional mortgage lender requirements. If you can reconcile the pros and the cons, then a hard money loan might be a good option for you.