Hard money loans are sought out by individuals who need money quickly. Depending on your situation, it could be considered a “last resort” loan. In most instances, these types are loans are used to secure a real estate purchase. In fact, a hard money loan is probably the best bet if you plan on using it for that purpose.
When going the traditional route, a lender could take anywhere from 1-3 months to approve the loan. Some folks simply don’t have that amount of time.
Hard money loans, also known as bridge loans, are secured by using real estate. These loans are excellent because they have far fewer requirements than traditional loans:
- Credit score doesn’t matter because lending is only looking at collateral.
- Lenders only look at the real estate because it’s a guarantee that the loan will be repaid.
- Since collateral is the only requirement, lenders can make quick decisions.
- Banks approve loans based on collateral and the ability to pay.
- Hard money lenders take a chance on you even if your credit worthiness is questionable.
Hard money loans are usually approved for investors, whereas, regular lenders will not take that chance because they want assurances that the money will be paid back. In many cases, hard money loans can help individuals who are facing bankruptcy or foreclosure. In some cases, individuals who cannot qualify for traditional home loans can opt for a hard money loan.
A number of properties can be purchased with hard money loans including single homes, business properties, apartment buildings, industrial properties and industrial properties. As long as your collateral and personal finances are intact, this type of lean will be pretty easy to secure.
The Loan to Value Ratio (LTV) is what lenders most often look for when evaluating your worthiness for the loan. If your LTV is no more than 70%, you are likely good to go. The primary concern is the ability to repay the loan. If you cannot, the lender will have a way to recoup their losses by retaining the collateral.
While the pros of a hard money loan include quick approval and flexibility, their are also cons to these types of loans. Some of the disadvantages:
- Cost: Interest rates could run as high as 15 to 20%. The main focus of the lender is to secure their money back. High interest rates give borrowers much more incentive to pay back the loan.
- Short Term: While traditional banks have lending terms of up to 30 years, hard money loans are usually from 6-20 months.
- Loss of Property: If you are unable to pay back the loan, there is the possibility that your property will be taken by the lender.
Many borrowers looking for hard money loans often wonder who they should contact. In the vast majority of cases, the loans come from private investors with deep pockets. Because they are investors, they offer a higher than average interest rate. Additionally, the lender can be one individual or a group of investors.
The best time to use hard money loans is if you need quick access to capital. It can also be used if the investor is looking to get a higher return. Borrowers should also know that the terms hard money loans are not etched in stone. Everything is negotiable. You do have the ability to shape the loan to your specifications. But remember, always pay close attention to the terms.