In a perfect world, mortgages would be one size fits all, but that’s not the case. Sometimes people need money for quick purchases, and others can’t qualify for traditional mortgages. A hard money loan is one solution, but it’s not right for everyone. Read on for some important information on hard money loans.
What Is a Hard Money Loan?
Hard money loans are real estate loans that are made based on the value of the property rather than the borrower’s ability to repay. There are several types of hard money loans, including these:
- Bridge loans
- Owner-occupied loans
- Construction project loans
- Fix and flip loans
A hard money lender may be a firm or private individual, and they consider loans on an individual basis. If you can’t get a loan through conventional channels, a hard money loan may be right for you.
How They Work
Hard money loans aren’t easy to access. Most lenders won’t give them for non-investment purposes, which means that if you’re counting on them to fund your own home, you may be disappointed. They’re given for short terms, usually two years or less. Rather than splitting the monthly payment between the interest and the principal, most loans require interest-only payments or a single balloon payment at the end. While hard money loans have several advantages for real estate investors, they do require a financial contribution on your part.
Hard Money Lending vs. Bank Loans
Traditional bank and hard money loans are radically different. Though they both allow investors to buy property, that’s where their similarities end. Hard money loans are given out by private entities, and typically have shorter terms and higher rates than bank loans. Their underwriting standards are similar to those for traditional mortgages, but hard money lenders are usually more forgiving of bad credit, bankruptcies, and foreclosures.
The Advantages of Hard Money Loans
The ‘hard’ in hard money loans is a bit of a misnomer. In reality, these loans provide a range of simple benefits.
- Fast money: Rather than spending weeks filling out forms and searching for funding, an investor can usually get money in less than a week.
- Flexible terms: Because you’re working with a private individual or firm instead of a large lender, you’re more likely to get a loan that’s customized to your situation.
With access to a substantial amount of cash, a hard money loan may make the difference between getting a great deal and losing it.
Disadvantages of Hard Money Loans
Although hard money loans offer tremendous value, there are some downsides to consider. They come with high interest rates and short terms, and the lack of government oversight is quite concerning to some. Furthermore, you’ll pay more in underwriting fees, origination fees, and early payment penalties.
If you’re searching for hard money financing, there’s some good news: there’s a tremendous amount of variability in lenders’ standards. While the value of the property purchase is a primary factor, most lenders will look at your finances as well. You’ll have to provide a down payment; it’ll be a percentage of the property’s current or approximate retail value. It’s important to note that each lender has its own standards, and that every lender is unique.
Hard money loans are a source of fast cash for real estate investors who can’t get it anywhere else, but they should be used wisely. With the information in this guide, it’s easier to make an informed purchase decision. We can help you fund your next business project; call us today or click to get started.