Hard Money Loans Indianapolis
Purchases Hard Money Loans Can Be Used For
A hard money loan can be used to purchase just about any kind of property on the market. Generally they are used for home flipping, a form of real estate investing you may have seen before on TV where a rundown home is rehabbed before being returned on the market. But a hard money construction loan could also be used to build brand new homes or commercial buildings depending on how long the construction project would take. Basically, a hard money loan is intended to be used to fund just about any investment or development for a short period, or until it can be replaced with a mortgage.
Why Hard Money Loans Can Be Better Deals Than Traditional Mortgages
Usually if you’re trying to get a house that you intend to live in for years to come, a traditional government-backed mortgage or private mortgage is the recommended way to go. But if you’re looking to get into investing in real estate for a profit where closing a deal on a property has to be done quickly, that’s where a hard money loan could be better than a mortgage. Why is that?
Both mortgages and hard money loans are secured by the property being purchased, but usually mortgages are only approved on the basis of the borrower’s ability to repay them over an amortization schedule, while hard money loans are generally based more on the equity of the property being purchased. Because of what happened in the 2008 subprime mortgage crisis, laws like the Dodd-Frank Act have made getting approved for a mortgage much tougher. Even for those who may meet credit score requirements, income requirements and not have any foreclosures or defaults on their record, the process to go through their eligibility and release any mortgage funds to them could take weeks or even months, a period you can’t wait when you are trying to purchase a property quickly.
You could get a hard money loan within days if the contract you negotiate with the lender is favorable and due diligence has been done on the property. While you still need to have income in order to prove you can repay the loan, your current cash reserves and credit history are much less of factors than the property value and its after repair value (ARV). You also could get a bridge loan, a hard money loan using equity in other properties you own that can be used to fund a new property investment as you wait for an already completed one to sell.
Risks That Come With Hard Money Loans
It is important to know that while there are many advantages to hard money loans, the risks can be quite numerous as well. You have to repay them over a much shorter period which will usually mean not only higher payments than regular mortgages but higher interest rates as well. While there are some laws that govern these loans, they are not as closely regulated as regular loans which means you had better read your contract carefully before signing. The bottom line is if your real estate investment doesn’t go as planned, you could stand to lose a lot of money quickly.
If you’ve decided hard money loans in Indianapolis are what you need, all you need to do is locate a lender near you. Just make sure to do your research on the lender to see if their record of making loans is solid and they don’t have complaints against them. Contacting a real estate agency or mortgage broker is one way to find this kind of lender.
It is a loan in which real estate is used as collateral. The borrower’s credit history is of relatively little importance in a hard money loan, as the value of the real estate more or less guarantees payment to the lender.
Hard money loans usually have short terms of about a year, but in some cases, the term can be extended to up to five years. Because of this and the fact that they can constitute a substantial risk for the lender, they typically have high-interest rates of 10 to 18 percent. However, this high price is sometimes compensated for in the advantages it gives to the borrower, such as an extremely fast approval rate (one or two days as opposed to 30 to 45 days with a traditional loan) and lack of traditional underwriting (which allows for adjustments to be made to the repayment schedule).
Traditional lenders such as banks do not grant hard money loans. Furthermore, though they are largely unregulated in the United States, some states have restrictions on interest rates for private loans that make it unprofitable for any lender to give a hard money loan.
How does a hard money loan work?
Even though this is a somewhat primitive type of loan, there are several important things to keep in mind about it.
How are they approved?
Lenders will determine the value of a property by hiring an independent appraiser or getting a broker price opinion. They will then approve on the basis of the loan-to-value (LTV) ratio, which is the loan amount divided by the value of the property. Most lenders will not approve if the LTV is above 65 or 75 percent. This is lower than acceptable LTV ratios for traditional loans because the property is the only security this loan has.
If the property is going to be renovated or repaired, lenders may use the after-repair value (ARV) to determine the LTV. This is riskier and usually results in a higher interest rate.
But overall, it is usually very easy for a borrower to get approved for a hard money loan if he/she has the equity. In fact, sometimes the lenders stand to make more of a profit if the borrower defaults than if the loan is paid off.
What kind of property can be used?
Technically, any kind of real estate can be used. But often, lenders specialize in a certain type of property and are only willing to work with that type.
If someone is trying to borrow against a residence occupied by the owner, hard money lenders might turn down the offer because there are so many guidelines and regulations to deal with.
Both properties that are already owned and ones that are about to be acquired can be used in a hard money loan.
How does a borrower qualify?
All that is typically required of the borrower is a plan to pay the loan back. But because these lenders are private investors, the requirements can vary.
How is the loan paid off?
Often, monthly interest-only payments are made until the loan is paid off all at once, though sometimes monthly principal payments are made as well.
Who would benefit from a hard money loan?
Real estate investors can, in some situations, gain a competitive edge from being able to close on property quickly. “House flippers” can benefit from the quick-and-easy approval process, as they usually plan to sell the house quickly after repairing it anyway. Anyone with bad credit who needs to act quickly — those facing foreclosure, for example — can benefit from a hard money loan.