A method of borrowing money for the purchase of real estate that doesn’t involve the use of a traditional mortgage is called “hard money.” Since traditional mortgage loans can be difficult to obtain, hard money loans have become a fast and easy solution for a lot of real estate investors and developers. Below you’ll find information about the ins and outs of hard money loans.
About Hard Money Loans
Unlike traditional mortgage loans, hard money loans are made based on the value of your property that’s used for collateral. Hard money lenders are investment companies and private investors that consider each individual application during the loan approval process. While banks follow strict guidelines, hard money lenders are more lenient and likely to forgive poor credit, foreclosures and bankruptcies. Banks go to great lengths to make sure you are able to repay a loan, but hard money lenders focus on the collateral because it gives them a recourse in the event that the loan goes south down the road.
There are a variety of different hard money loans. A bridge loan allows you to purchase a property that you plan to refinance or resell. You can also use a bridge loan to purchase a property before getting the cash down payment from selling a property that you already have in your portfolio. A fix-and-flip loan is self-explanatory – it enables you to buy a property, fix it up, resell it, and then pay off the loan. A construction loan will let you start a new construction project, then refinance or sell the property as soon as possible.
About ten percent of hard money lenders provide owner-occupied loans in some states, but most do not because there are a lot of regulations that accompany consumer loans. The Dodd–Frank Wall Street Reform and Consumer Protection Act is an example of a regulation that must be followed and can complicate the lending process. There are also licensing requirements that would not otherwise apply. If you’re interested in an owner-occupied loan, there’s still a chance that you can find a hard money lender that offers this type of loan.
How Hard Money Loans Work
The turnaround time for a hard money loan is usually less than a week. Borrowers typically must have a cash down payment that will be determined based on the Loan-To-Value (LTV) or After-Repair-Value (ARV) ratio. Just keep in mind that it depends on the hard money lender, and the criteria varies. The term for hard money loans is usually from 12 months to several years. The payments are unlike most traditional bank loans because you may not be required to make equal principal and interest payments each month. Instead, you may only be required to make monthly interest payments. There are even loans that don’t require any payments until the loan matures, at which point you’ll make a balloon payment. That final payment includes the principal, all remaining interest and any fees.
Is a Hard Money Loan a Good Alternative?
You might be wondering who uses hard money loans instead of traditional mortgage loans. They are usually secured when someone does not have another lending option, needs money fast or has poor credit scores. Despite the fact that hard money loans have high interest rates and sometimes many fees, they still work for a lot of people. It’s often used as a tool by real estate investors because they value the benefits. Quick money, flexible terms and lenient requirements provide real estate investors with the financial resources needed to achieve their goals.
If you’re in a buyers market, then it wouldn’t be a good idea to get a hard money loan because it could be difficult to sell the property after fixing it up. You also don’t want to get a hard money loan if a cheaper option is available. The reality is that sometimes no other option exists, which can make a hard money loan a great alternative.