About Hard Money Loans
Hard money loans are based on the value of your collateral, which is your property. Subsequently, hard money lenders are less concerned about your ability to repay the loan. Not that your financial standing isn’t a factor, it just isn’t necessarily what determines if you will get approved. This is clearly a different way of lending than what you’ll find with traditional mortgage lenders that focus on your income and credit scores. As investors, hard money lenders look at each application individually instead of using a cookie-cutter approach with a rigid list of requirements.
When it comes to the types of hard money loans that exits – there are several. There’s the construction loan, bridge loan, fix-and-flip loan and owner-occupied loan. If you’re interested in an owner-occupied loan, you might have a more difficult time finding a hard money lender because they tend to shy away from consumer loans. Owner-occupied consumer loans are heavily regulated and make the lending process far more difficult. However, in some states about 10 percent of hard money lenders offer owner-occupied consumer loans.
Construction loans are for real estate developers who want to start a new project right away, then refinance it or sell the property as soon as possible. Fix-and-flip loan are clearly for the purpose of buying and flipping a property that will be sold and paid off. Bridge loans are unique because you can buy a property now, even before you have the down payment from the sale of a property that you already own. You can also use bridge loans to buy a property fast, then refinance or resell it. As you can see, there are different solutions for different situations.
How Hard Money Loans Work
If you’ve ever had a traditional mortgage, then you might be surprised at how fast hard money loans can be financed. In fact, it’s such a hassle-free process that it can take less than a week to complete. There’s a good chance that you will have to put cash down that’s based on your property’s Loan-To-Value (LTV) or After-Repair-Value (ARV) ratio. However, hard money lenders often have drastically different criteria, so it depends on the lender.
A key aspect of hard money loans is that they are extremely short term – from one to several years. Instead of monthly payments comprised of the principal and interest, there’s a chance that you will only make interest payments. There’s even a possibility that you won’t have to make any payments until the conclusion of your loan when the balloon payment is due. The balloon payment will bring the balance to zero because it requires paying the principal, all remaining interest and any fees that have been added to the loan.
The Pros and Cons
The benefits of a hard money loan include fast money, lenient requirements and flexible terms. Ultimately, this means you will have access to a financial resource that allows you to pursue new investment opportunities. The elements of hard money loans that are considered a downside include the fact that interest rates are high, there could be a lot of fees and there isn’t much government oversight. You could also have a hard time refinancing because of traditional mortgage “seasoning” requirements. Despite these issues, many investors recognize that hard money loans are a valuable tool that’s available when you need it.