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The name “hard money loan” may seem daunting, but it can actually be a really great tool for a real estate investor. Before you consider getting a hard money loan, it’d be a great idea to know exactly what one was.
What exactly is a hard money loan?
A hard money loan is a real estate loan that is based off of the value of your collateral rather than your ability to pay the loan back.
There are several types of hard money loans available. They include the following:
This type of loan is an extremely short-term loan that enables someone to buy a property quickly so that they can sell it or refinance it.
This loan helps people who don’t qualify for other types of loans purchase property for themselves
This type of loan helps a developer quickly get started on a new construction project so they can fix it up and sell it
What are hard money loans for?
Hard money loans are primarily used for investment purposes. They’re not used for real estate loans where people will be living in the properties they purchase themselves.
What’s the difference between a hard money loan and a traditional loan?
There are several key differences between traditional loans and hard money loans.
- Hard money loans come from individuals or organizations instead of a traditional bank.
- Hard money loans have a much shorter repayment period, usually lasting about a year or so. This is simply because the loan is only intended to last a short period before the purchased property is flipped or refinanced..
- Hard money lenders are a lot more forgiving of dark spots on a person’s credit rating like poor credit scores or bankruptcies. These hard money lenders are more concerned with the value of the real estate that’s going to be used as collateral for the loan.
What are the benefits of getting a hard money loan?
There are several benefits to getting a hard money loan. They include the following:
- You get your money quickly, usually within the week or less rather than the much longer time it takes to get money from a traditional lender.
- The terms are a lot more flexible since you’re working with individuals and organizations directly. They’re much more likely to tailor repayment terms to your needs.
- You’ll be able to respond quickly to fast moving real estate deals instead of missing out because you don’t have the funding, making these types of loans really great for investors.
The downsides to hard money loans.
There are a few downsides to hard money loans that you should consider when you’re thinking of applying for them. Those downfalls include the following:
- They have really high interest rates, especially when compared to traditional loans. These interest rates often go high into the double digits.
- There is little oversight when it comes to hard money loans, making it easier for you to fall victim to unscrupulous lenders. Do your homework.
- These types of loans usually have a lot of high fees, including underwriting fees, early payment penalties, origination fees and construction draw fees.
Should you go for a hard money loan?
In spite of the downsides to hard money loans, there are many reasons that you should consider going for one. You may have stumbled upon a can’t-miss real estate opportunity, and you can’t get funding elsewhere. Maybe your credit score is really low, preventing you from getting a traditional loan or a personal loan. If you are able to land one, you’ll most likely get it at a very high interest rate. Maybe it’s simply that you need money quickly, a situation that is very common in markets where real estate rarely spends less than a day on the market before being snatched up.
A non-traditional method to acquire funds is through a hard money loan. This sort of loan is provided by investors who provide to lend based on land collateral. When a man or woman is not able to get financing through conventional means, the hard money strategy might be the only choice. The following explains how this sort of loan works.
What is a Hard Money Loan?
Nearly all loans are made based on repayment capacity. This is determined by an individual’s income and credit rating. If the person has had a fantastic history of borrowing money and paying it back, then that person will probably get the loan they need. Traditional lenders can be quite slow to accept loans, even if the candidate has an exceptional income and solid credit score. Someone having a negative credit history or an low-income might never receive a loan approval.
A hard money lender provides a loan based on the collateral, a individual provides, like a home or property. This loan is generally easier to get because it isn’t based on the capacity to repay it. If the borrower can’t pay the money back, the lender only requires the security and sells it to recover their funds. The collateral has a greater value than the borrower’s credit score or income. Since the rate of interest for a hard money loan is significantly higher than a conventional loan, it’s practical for only a brief time period, averaging between one to five decades.
Why Get a Hard Money Loan?
With a higher rate of interest, a hard money loan might not look like a fantastic option. For those who Can’t qualify for a traditional loan, it will offer the following advantages:
• Fast money. A hard money loan closes quickly because the lender isn’t concerned with a borrower’s financial standing, only the security provided. Lenders also don’t have to invest time in taking a look at bank statements or verifying a debtor’s income. Once the connection has been established, the loan process can proceed smoothly, and the debtor will receive their money straight away.
• Flexibility. Since every hard money loan is assessed individually, the approach provides more flexibility than the conventional loan procedure. Based on the borrower’s situation, repayment schedules can be adjusted to better suit both parties. This is because there’s a direct relationship between lender and borrower, as opposed to borrower and a business with strict rules.
• Approval. The most important concern for hard money lenders is security. Most aren’t concerned with a debtor’s credit history, though some might ask general financial questions throughout the acceptance procedure. Lenders like a low loan-to-value ratio as this will allow them to immediately sell a property in the event the borrower defaults.
When Does it Make Sense to Use Hard Money?
Hard money is best suited to your short-term loan. This sort of financing is frequently used by people who purchase and “flip” houses. It makes sense as the debtor only occupies the property long enough to improve its value. If the individual wishes to stay there forever, it’s much better to refinance.
Drawbacks of Using Hard Money
While hard money loans are usually easy to get, they’re not an ideal solution. They are pricey, and the plan must work smoothly for all parties to gain. Moreover, lenders may appreciate the collateral property in a lower value than the borrower favors. Borrowers must also consider other kinds of financing, which might help them come out ahead in the long run. Someone may be eligible for an FHA loan even without a perfect credit history. Interest rates for hard money loans may encounter double digits, and the borrower may be made to pay an origination fee to close the loan.
How to Find Hard Money Lenders
Those who must borrow money and wish to acquire a hard money loan may reach out to local property investor groups and brokers for the names of lenders that operate based on security. Talking with a few distinct lenders and building strong relationships is the path to getting funds fast when they’re required.