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A Guide to Hard Money Loans
There are times when regular mortgages may not be the best option. For instance, real estate investors who need money quickly to purchase a property should consider a hard money loan. Hard money loans are a kind of real estate loan.
Different Types of Hard Money Loans
If you are thinking about applying for a hard money loan then you have many options to choose that include:
Bridge loans: A bridge loan is a hard money loan that enables an investor to purchase a property fast with the intention of refinancing or reselling it. In addition, bridge loans are ideal for those who want to buy a new property before they have sold a currently-owned property. It gives the borrower cash before they get enough money for a down payment from the sale of another property.
Owner-occupied loans: Owner-occupied loans are for investors who are not able to qualify for other finance options. These loans enable an investor to purchase a property for themselves.
Construction loans: Construction loans are for real estate developers who want to start a new construction project quickly. Most investors who take out construction loans have the intention to refinance or sell the property quickly.
Fix-and-flip loans: Fix-and-flip loans are for individuals who want to purchase a property to make quick renovations with the goal to sell or refinance the property.
How do Hard Money Loans Work?
Hard money loans are not available for everyone. Most hard money lenders will only issue a loan for investment purposes, so individuals who want funding for their private residence may have to explore other options.
Hard money loans are only for short periods, which is typically less than a few years. Most hard money loans have a term of 12 months. However, borrowers will not make equal monthly payments on the principle and interest, but they are usually only required to make interest-only payments. The loan is typically paid off at the end of the project with one balloon payment. This payment will cover the remaining interest, principle, and other fees.
What Advantages Does a Hard Money Loan Offer in Ann Arbor?
There are a number of advantages to taking out a hard money loan. Hard money lenders are private firms that are usually able to offer customized loans that are specifically tailored to meet your needs.
They also offer lenient requirements. With regular mortgages, banks have eligibility requirements that include a high credit score, low debt-to-income ratio, and source of income. Hard money lenders may check credit scores and income, but they are not the deciding factors of hard money loans.
Furthermore, hard money loans allow real estate investors to get funds quickly, which increases investment opportunities. If an investor uses a bank or other financial institution, it could take several weeks to months to get approved for the loan. With hard money loans, investors could have the funds in less than a week.
What are the Eligibility Requirements for a Hard Money Loan?
Unlike banks, hard money lenders do not focus on your ability to repay the loan. Instead, they focus on the collateral that is offered. Since collateral is the primary factor that determines eligibility, most hard money lenders will want to see a full appraisal of the property that will be used as collateral.
A down payment is another factor that determines eligibility. Most lenders want a down payment for a hard money loan, which is usually based off of the current value of the collateral or the after-repair value (ARV).
Hard Money Loans are Private Loans Based on the Value of Collateral
Hard money loans are simply a type of mortgage that is for real estate with short-term loan terms. These loans are funded by companies or private investors and not banks or credit unions. The terms of hard money loans vary from two to five years. The types of hard money loans include, but are not limited to:
• Fix-and-flip loan: These loans provide you with a way to purchase property, rehab it, resell it and pay the loan off quickly.
• Construction loan: These loans allow a real estate developer to start building a project quickly with the goal of refinancing and selling it as quickly as possible.
• Owner-occupied loan: These loans provide you with a way to purchase a home if you don’t qualify for a traditional mortgage.
The disadvantage of obtaining any type of hard money loan is that a lender requires cash up front. The specific amount depends on the value of the property used to obtain the loan. Traditionally, the down payment is 20 percent of the Loan-to-Value (LTV) ratio or After-Repair-Value (ARV) ratio.
The advantage of hard money loans is that lenders don’t base their decisions on things like credit scores, income and debts. Instead, they are more interested in the actual value of the property. The property or something of value is always used as collateral for hard money loans.
When Should You Consider Taking a Hard Money Loan?
Hard money loans are usually used for business investments. However, they are for everyday people wanting to purchase property without going through traditional banks and credit unions. Everyone’s situation is different. However, there are some few situations where hard money loans are the way to go:
• You can’t obtain financing anywhere. Funding is difficult, whether you are a real estate investor, private investor or someone wanting to buy property. If banks and other lenders don’t want to provide financing, you may want to try a hard money loan.
• You need money immediately. Hard money loans get you the money you need sooner than a traditional mortgage. This is helpful because real estate moves quickly. So you may miss an investment opportunity while waiting for a traditional mortgage.
• Your credit score is poor. Hard money loans are based off the property’s collateral, not whether a person can repay the loan. This means if you have bad credit or poor credit score, you may not qualify for a traditional mortgage regardless of the amount you have for a down payment.
When to Avoid Hard Money Loans?
Avoid taking a hard money loan out if your situation includes things like not having good financing in place. If you don’t have the money for refinancing a loan, you should avoid taking a hard money loan. You have other financing options available, hard money shouldn’t be an option. Those other financing options may have better interest rates and repayment terms.