About Hard Money Loans
Hard money loans are an asset-based real estate loan that considers the value of your property as collateral, instead of your ability to pay. While your ability to pay back the loan is important, hard money lenders are more interested in the collateral. This is starkly different from traditional mortgage lenders that make lending decisions primarily based on your credit scores and income.
Hard money lenders are individual investors and investment firms that also weigh applications individually without the strict guidelines of traditional mortgage lenders. In fact, they are often willing to overlook bankruptcies and foreclosures. There are different kinds of hard money loans, such as construction, bridge, fix-and-flip and owner-occupied.
The owner-occupied loan is less common because hard money lenders tend to avoid the extensive regulations associated with owner-occupied consumer loans, such as Dodd-Frank and certain licensing requirements. These loans are for the purpose of consumers purchasing a property where they intend to live. Since it’s been reported that 10 percent of hard money lenders offer owner-occupied consumer loans, there is still a chance that you can find a loan that fits your needs.
A construction hard money loan is for real estate developers who want to start a new construction project, then refinance or sell it. Fix-and-flip loans are for buying, fixing up and then selling a property as soon as possible, at which point you will pay the loan off. A bridge loan enables you to buy a property fast, then resell or refinance it. You can also use this loan to buy a property before you get the cash down payment from another property that you own.
A Closer Look at Hard Money Loans
You will probably need a cash down payment for a hard money loan and the amount is based on the property’s Loan-To-Value (LTV) or After-Repair-Value (ARV) ratio. The application process is streamlined and the turnaround time is fast. You can sometimes apply and have a loan funded within a week. Hard money loans are for a short term. Generally speaking, the term is from one to several years. As opposed to making principal and interest payments each month, you may only be required to make monthly interest payments. There’s even a possibility that you won’t have to make any payments until the end of the term when the balloon payment is due. This final payment will include the principal, all remaining interest and all fees.
Is a Hard Money Loan Right for You?
There are downsides to hard money loans that should be considered. Hard money loans have high interest rates that can reach the double digits and there are often a lot of fees involved, such as origination, underwriting and construction draw fees. Hard money loans are for a very short term and there’s a chance that you might have a hard time refinancing because of the “seasoning” period that requires you to have the loan for a certain period of time.
Most people who use hard money loans do so because they have low credit scores, need money right away or are unable to get funding from a cheaper source. Many real estate investors have come to appreciate having access to money when they need it. They also enjoy the fast application process, flexible terms and relaxed requirements. Hard money loans allow people to invest in properties when they otherwise would not be able to. Sometimes, that’s the bottom line.