What are Hard Money Loans?
Hard money loans are a type of loan that uses the value of the collateral as the major factor for lending money for the purchase of real estate. While conventional loans and hard money loans both act as a vehicle for the purchase of real estate, they are very different. Hard money loans typically have very short repayment periods and they carry high interest rates. There are a number of options when it comes to types of hard money loans such as:
Construction Loan – This loan type provides financing options for a real estate developer to get started on the latest project right away and ultimately sell or refinance the project.
Bridge Loan – With a bridge loan an individual can purchase real estate quickly while it is available and then sell it fast or refinance the property. In some cases this can allow the individual to gather together the money necessary for a down payment or improve their credit situation in order to gain approval through a conventional lender.
Fix-and-flip Loan – This loan type is often used by investors that plan to purchase a property, rehabilitate it and then sell the property very quickly allowing for the complete payoff of the loan.
Owner-occupied Loan – Those borrowers that are not able to qualify for conventional financing might turn to these loan types in order to purchase a property to live in. Perhaps the buyer can manage the higher monthly payments and interest rate, but simply can’t qualify for other loan types.
Is a Hard Money Loan the Right Choice?
There are a number of factors that are important when considering a hard money loan for your real estate purchase. Some of the downsides related to these loan types include:
High Interest Rates – The higher interest rate is perhaps one of the most obvious negative aspects of hard money loans. These interest rates can range up into the double digits.
Additional Fees – In some cases hard money loans carry high fees in addition to the high interest rate. These might include origination fees, construction draw fees, underwriting fees and even pre-payment fees.
Government Oversight – While conventional lenders and mortgage companies are typically held to a higher standard by government, there are fewer rules, monitors and regulations related to the hard money lenders requirement that borrowers take great care in which lender they choose to work with.
Short Loan Terms – Due to the nature of hard money loans, terms as low as one or two years are expected. This means that the entire loan as well as any fees and finance charges will come due and payable very quickly.
How to Obtain a Hard Money Loan
If you have weighed the options and decided that a hard money loan is the best choice for your situation, you will want to choose the lender carefully. One way to find these lenders is by reaching out the real estate investors in your area. It is likely that they can give you some direction as to who to stay away from and who is reputable. After narrowing down the options, check out the potential lender online and with the Better Business Bureau. This will provide valuable information about any complaints filed against the lender.
It’s important to weigh your options carefully when choosing a lender and the type of loan that fits your needs. Take the time to learn about the prospective lenders and consider how you will repay the loan when it comes due.