About Hard Money Loans
Hard money lenders are individual investors and private companies that have the autonomy to approve loans on an individual basis. Instead of adhering to cookie-cutter standards like traditional mortgage lenders, they’re able to assess each individual application and make any necessary considerations. For instance, traditional mortgage lenders primarily consider your credit and income when gauging your ability to repay a loan. Hard money lenders focus more on the value of your collateral. In fact, they may even forgive poor credit, bankruptcies and foreclosures.
There are various types of hard money loans that serve different purposes. If you’re interested in buying a property now and either reselling or refinancing it, a bridge loan could work for you. This type of loan is also good for buying a property and getting the cash down payment from the sale of a property that you already own. Fix-and-flip loans let you buy, rehab and resell a property, then pay off the loan. There are also hard money construction loans for real estate developers to start a new construction project, then either sell or refinance it as soon as possible.
A less common option is the owner-occupied loan for people who cannot secure a traditional mortgage for a property in which they intend to live. Only a small percentage of hard money investors offer this loan because of the additional regulations that apply to consumer loans. If you are interested in an owner-occupied loan, there is still hope of finding a hard money lender.
How Hard Money Loans Work
If you ask someone about the perks of a hard money loan, they will probably mention the fast application process. Hard money loans can take less than a week to fund. Typically, borrowers must provide a cash down payment that’s determined by the Loan-To-Value (LTV) ratio or After-Repair-Value (ARV) ratio. The term for hard money loans is often between one year and several years.
Depending on the lender and the loan type, you may only be required to make monthly interest payments instead of monthly principal and interest payments. There are even some loans that don’t require you to make any payments until the maturity date. At that point, you’ll make a balloon payment that includes the principal, all remaining interest and any fees that were added to the loan.
Is a Hard Money Loan Right for You?
You should definitely understand that hard money loans have short terms, high interest rates and fees. Given that there is little government oversight for this type of loan, you should be careful about the lender that you select. There might also be an issue with refinancing because of traditional mortgage lender requirements.
Despite the downsides, a hard money loan could be a good option, but there are questions that you should ask yourself. For instance, do you have another loan option? Do you need fast access to money? Many real estate investors use hard money loans because they offer quick money, flexible terms and relaxed requirements that are beneficial enough to mitigate any concerns.
Sometimes it’s simply a matter of leveraging the benefits of a hard money loan when an investment opportunity arises. Everyone’s situation is different, so it’s important to weigh the pros and cons in order to decide what’s best for you.