Naperville-Illinois Hard Money Loans
A hard money loan is a real estate loan that uses your property as collateral, instead of your ability to repay. Generally only offered for investment purposes, a hard money loan is a source of short-term funding.
Types of Hard Money Loans
As private firms and individuals offer these loans, they’re provided on a case-by-case basis. Some of the more common types include:
- Bridge loans let individuals purchase a new property with the goal of refinancing or reselling it.
- Fix-and-flip loans let people buy properties for quick renovation with the intention to resell.
- Construction loans give real estate developers the ability to begin a new construction project without having to go through traditional lending options.
- Owner-occupied loans allow consumers who don’t qualify for traditional financing to buy personal property.
What You Should Know About Hard Money Loans
Most hard money loans are for short periods—12 months being the most common term. You’re often only required to pay interest-only payments, and in some cases, don’t have to make any payment at all. Expect to make a down payment. Lenders require cash based on the after-repair-value or loan-to-value ratio of the property. Hard money loans are paid off in full at the end of the funding period.
Differences Between Traditional Loans and Hard Money Loans
It’s much easier to receive approval for a hard money loan in comparison to a traditional loan. Lenders are more likely to overlook bankruptcies, recent foreclosures and bad credit. However, if the loan’s for personal use, the lender must follow Dodd-Frank regulations and verify your ability for repayment. Most hard money lenders don’t offer loans for personal use, as they’re required to undergo strict, expensive licensing requirements.
Pros and Cons
Some benefits of a hard money loan include:
- Quick funding. Expect to receive funding within a week or less, as opposed to a multi-week or multi-month process for a traditional loan.
- Lenient requirements. Hard money lenders focus on the value of your collateral, paying less attention to your credit score, debt and income level.
- Flexible financing terms. If you’re getting a loan to invest, the flexible terms let you personalize the loan to fit your situation.
- Superior investment opportunities. Because you can get cash in a matter of days, you’re able to quickly take advantage of real estate deals or other investment opportunities.
Cons of hard money loans include:
- High-interest rates and fees. Consider the included costs while determining if quick access to financing is worth it.
- Short loan terms. You need to make sure that you’ll be able to repay the loan in full once the term ends. Keep in mind that some lenders let you pay off your loan over longer periods of time, but you’ll receive a higher interest rate.
Requirements and Costs
It’s a bit difficult to pinpoint requirements, as each lender has different things they’re looking for. The current value of the property you’re using as collateral is the most important thing for most lenders. If you’re planning to use the money to buy and flip home, lenders typically want to know the after-repair value and an appraisal on the property.
Alternative Loan Options
Consider the following alternative financing options:
- A home equity loan, where you get a loan backed by the amount of equity in your current property.
- Cash-out refinancing, which is similar to a mortgage refinance. The difference is that instead of refinancing the remainder of your mortgage, you’re able to borrow a larger amount of money and have the extra equity loaned to you.
- A home equity line of credit or HELOC gives you access to a line of credit based on the equity in your current properties.
- If you’re affiliated with the military, a veteran’s administration (VA) loan is a possible option. These loans have high credit requirements, but they offer interest rates that are more favorable.