When most people purchase real estate, they obtain financing through a mortgage at a bank. However, for those who have had bad credit, foreclosures, bankruptcy, or other financial difficulties, this option is often not realistic. But rather than sit by and watch others purchase the investment properties they were poised to buy, it is possible to obtain a hard money loan. Offering the ability to get cash quickly and be used in many different ways, hard money loans are an interesting alternative to those real estate investors willing to think outside the box.
What is a Hard Money Loan?
When attempting to get a hard money loan, those giving the loans are not interested in the recipient’s ability to repay the loan. Instead, they look at the value of the property to be purchased, since this will be the loan’s collateral. As an example, if an investor wants a hard money loan to purchase a $100,000 property, they will probably be given a loan based on 80-90% of the property’s value, meaning they will need to have up to $20,000 of their own money to buy the property.
Are There Different Types of Hard Money Loans?
Since hard money loans offer tremendous flexibility, investors can use them for a variety of purposes. For example, many investors get what is called a fix-and-flip loan, which allows them to purchase a property, fix it up quickly, then resell it to gain their profits and pay off the loan. For other investors, hard money loans can be used for construction projects, letting them start a project much quicker rather than wait for traditional financing. However, since these loans are usually made by private institutions and individuals, most situations are considered on a case-by-case basis, so in some ways the possibilities are endless.
What are the Terms of Hard Money Loans?
With most hard money loans, the biggest benefit is being able to get cash quickly in order to make a real estate purchase. However, unlike traditional mortgages that may have a 20 or 30-year payoff period, hard money loans have a payoff period of usually no more than three years, with many offering only 12 months to pay off the loan. In addition, they may also offer higher interest rates and a variety of fees, and use a balloon payment at the end to pay off all principal, interest, and fees. Therefore, when deciding to obtain a hard money loan, it is best to have a solid financial plan in place, which will allow an investor to ensure they can sell the property before the payoff deadline.
Are Hard Money Loans Available for Private Home Purchases?
In most cases, hard money loans are not made to individuals seeking to purchase a property in which they will live. In fact, it is estimated that more than 90 percent of all hard money loan lenders do not offer owner-occupied loans. For those that do, they are required by law to abide by federal regulations to verify the borrower’s ability to repay the loan, and also usually need to follow various licensing requirements. Since this essentially defeats the purpose of these loans, which is to get money quickly and easily, most lenders choose to focus solely on loans for investment purposes.
If you are an entrepreneur or real estate investor who wants to purchase a property immediately without having to worry about a long and complicated loan application process at a local bank, a hard money loan may be the answer. However, before making this commitment, make sure you have considered all financing options. If after doing so you know the financial plan you have in place is a good one, seek out a hard money loan source and get started.