Mortgage lending can be complex, especially when you are unable to quality for a conventional loan. If you find yourself in need of a loan for the purchase of real estate, there are alternatives that might be a good solution. The information below sheds light on hard money loans, including the different purposes for which they are used.
About Hard Money Loans
For starters, hard money loans are primarily for the purpose of real estate investing and they are made based on the value of your collateral. This is different than traditional loans that consider your ability to pay the money back. Further, hard money lenders are private companies and individuals. The decision to fund a hard money loan is made based on the unique circumstances of each potential borrower. There are different types of hard money loans, such as the construction loan, bridge loan, fix-and-flip loan and owner-occupied loan.
Here are a few more details about these specific types of hard money loans:
Construction loan: Enables a real estate developer to start a new construction project. The goal for this type of loan is generally to refinance or sell the property right away.
Bridge loan: This kind of loan lets you buy a property fast, then resell or refinance it. You can also buy a new property now, before getting the cash down payment from the sale of a property that you currently own.
Fix-and-flip loan: Aptly named, this loan is for someone who wants to buy and resell a fixer upper, at which point the loan will be paid off.
Owner-occupied loan: Although less common, this hard money loan is for consumers who are unable to qualify for more traditional loans.
The reason hard money lenders shy away from consumer loans for the purchase of private property is because they require adherence to more regulations, such as the Dodd–Frank Wall Street Reform and Consumer Protection Act, which requires a certain debt-to-income ratio so that borrowers are not overextended. Hard money lenders would also have to satisfy additional licensing requirements when providing consumer loans.
How Hard Money Loans Work
The term for hard money loans is typically less than a few years, but often about 12 months. Instead of making equal payments toward the principal and interest, you would make interest only payments. In fact, there are some hard money loans that do not require you to many any payments. The application process for these loans is simplified compared to more traditional loans and can take less than a week.
Hard money lenders require you to have cash that will be based on either the Loan-To-Value (LTV) ratio or the After-Repair-Value (ARV) ratio of the property. When it’s time to pay the loan off, that will occur in the form of a balloon payment that covers the principal, interest and fees in order to reach a zero balance.
Is a Hard Money Loan Right for You?
While there are advantages and disadvantages to hard money loans, deciding whether this type of loan is right for you might depend on whether there are other options. The obvious advantages are your ability to get money fast, relaxed requirements and flexible terms. Some of the disadvantages are the fact that the interest rates are high, fees are also high and there is a lack of governmental oversight for these types of loans. It can also be difficult to refinance because of traditional mortgage lending requirements.
If you’re trying to make a decision about moving forward with a hard money loan, you’ll have to weight the pros and cons. Many people use these loans because they have no other option. Others simply find that the pros of hard money loans outweigh the cons, especially the ease with which these loans can often be acquired.