Finding a mortgage loan that fits your needs isn’t always easy. This issue can be particularly challenging if you need money right away for the immediate purchase of real estate. Fortunately, there is a potential solution for this problem that you might not have considered.
Hard money loans are often used by real estate investors who need money fast and are unable to get a conventional mortgage. The information below provides an overview of hard money loans to help you decide if it’s an option that can work for your situation.
About Hard Money Loans
Hard money loans are for real estate investing and they consider the value of your collateral instead of your ability to repay the loan. Lenders of hard money take into consideration your specific situation, which is why there is a greater likelihood of getting approved. There are different kinds of hard money loans, with each serving a different purpose.
Bridge loans are useful if you want to buy a property fast and resell or refinance it. As denoted by the name of the loan, you can also use it to buy a property now, prior to getting the cash for a down payment from the sale of a property that you presently own. Fix-and-flip loans let you fix a rehab property, resell it and then pay the loan off. Construction loans are for new construction projects that you refinance and sell immediately. Although rare, owner-occupied hard money loans can help consumers with financing private property.
Because of regulations like the Dodd–Frank Wall Street Reform and Consumer Protection Act, hard money lenders tend to shy away from consumer loans. Dodd-Frank requires the lender to verify the borrower’s debt-to-income ratio, which is an indicator of their ability to repay the loan. Lenders who provide loans for private property also have to satisfy licensing requirements with the National Multistate Licensing System & Registry.
How Hard Money Loans Work
For starters, hard money loans are for a short term, which is typically a couple of years, but more often about 12 months. Instead of making monthly payments that go toward the principal and interest, hard money loans usually only require you to make monthly interest-only payments. In fact, there are some hard money loans that don’t require any payments.
The lending process for hard money loan is often streamlined and can take less than a week. Further, the overall application process is much easier than traditional mortgage loans. However, you will have to bring cash to the table that is based on the Loan-To-Value (LTV) ratio or the After-Repair-Value (ARV) ratio. Balloon payments are made to pay the loan off, which will include the principal, interest and fees.
How Hard Money Loans Are Different
In many ways, hard money loans are starkly different than traditional bank loans. While they tend to have similar underwriting standards, there are few other similarities. The terms and requirements for hard money loans vary significantly from one lender to the next. For instance, the repayment period is short, there can be a lot of fees and interest rates tend to be high.
Hard money lenders will often fund loans if you have poor credit, bankruptcies and even a recent foreclosure. This is not the case for traditional bank loans that tend to focus on your income and credit rate. Hard money lenders are more concerned about the collateral. Interest rates for hard money loans can range from 5.4% APR through 15% APR. Sometimes hard money lenders have a prepayment penalty and hidden fees. Many people who chose hard money loan are unable to get financing elsewhere, have a low credit score and need to find a solution quickly.