A hard money loan can look like an extremely attractive option. Hard money loan is a short-term loan extended by individuals and organizations to investors who are interested in short-term real estate. People flock to these types of loans because hard money lender can get them their money in as little as a week, they don’t have strict credit guidelines and they’re generally flexible to work with. While all of this is generally true, there are some things thatmake a hard money loan a great option for some people and a not-so-great option for others. Check out below to find out more.
Reasons that you should consider a hard money loan
A hard money loan could be considered for the following reasons:
No other lending institution will lend you money.
It can be really hard to get money for real estate investment purposes, and traditional lenders are understandably very jittery. They want to be sure that you’ll be able to pay them back at the end of the loan, and if you’re unable to, that will end up as a loss for them.
Your credit score is low.
Having a low credit score can make it virtually impossible for you to get a traditional loan. Hard money loans, on the other hand are based off of the collateral that you will be supplying. In this case, the collateral will be the property that you’re buying and rehabbing.
You need to get money quickly.
Sometimes a real estate deal of a lifetime lands in your lap, or an amazing investment opportunity is suddenly available to you. This is quite common in really high-end, busy markets like San Francisco or New York city where inventory is constantly moving. Being able to obtain cash quickly can make all the difference regarding whether you get to fund your investment.
Reasons That You Should Steer Clear of Hard Money Loans.
There are certain times where getting a hard money loan is not a great choice.
You’re planning on investing in a buyer’s market.
A buyer’s market means that homes are sitting around not getting sold. If you were to buy a property in that area in the hopes of reselling it, your chances would be slim. You’d then be saddled with a loan that you have to repay via refinancing. If you can’t refinance, you could be foreclosed upon.
You don’t have a plan in place in case you have to refinance.
While everyone goes into a real estate deal in the hopes that the property will sell at the end of the loan terms, sometimes it doesn’t. When it doesn’t, you’re going to have to refinance the loan into a more traditional mortgage in order continue to make the payments. If you don’t have refinancing options in place, you could put yourself in a really difficult financial bind. Another fact to consider about refinancing when it comes to hard money loans is that some traditional mortgage lenders require that you need to have owned the property for a certain period of time before they’ll allow you to refinance. If your hard money loan comes due before they approve your application financing, you’ll be on the hook for the loan.
You actually have other loan options.
If you can get another loan for your short-term real estate purchase, you need to do so. Hard money loans carry extremely high interest rates and short loan terms periods, so they should only be used as a last resort by someone who has other options.
At the end of the day there are pros and cons to getting a hard money loan. The pros are that you get your money fast, you don’t need to have good credit and the terms can be flexible since you’re dealing with individuals and organizations instead of traditional banks. On the flip side, hard money loans have high interest rates, making the final balloon payment even more expensive than it would be with a loan that had a low interest rate. They also have short terms, meaning that you’re on the hook for the money if the property doesn’t sell in time.