Hard money loans are a type of financing that is secured by real property. These loans are typically given out by private companies and investors. The interest rates on hard money loans are typically higher than the interest rates on residential property or commercial loans.
Hard money loans are typically paid back within six to 24 months. People often get a hard money loan because they are not in a position to qualify for traditional financing. The lender will use the loan-to-value ratio to determine how much they can lend you. The loan-to-value ratio is the loan amount divided by the value of the property.
How Hard Money Loans are Different
The main thing that traditional lenders look at when they are deciding whether to approve you is your ability to repay. They will look at your credit history. They will pay close attention to your payment history and debt. They will also look at your income.
It can take a long time for you to get approved for a traditional lender. Unless you have great credit and a high income, it can be hard to get approved for traditional funding. There are also several things that can delay the process. For example, if you have a negative item on your credit report, then the lender may reach out to you and ask you to explain it. It can also take longer to approve if you have income that is difficult to verify.
However, hard money lenders have a different approval process. They are not as concerned about your ability to repay because the loan is backed by collateral. If you are unable to pay back the loan, then all the lender has to do is seize the property.
Hard money loans are usually short-term loans. You do not want to take a hard money loan out for a long time because the interest rates are high.
Why do People get Hard Money Loans?
Many people wonder why someone would want a hard money loan because they can be expensive. However, there are several advantages that come along with getting one.
The main thing that hard money lenders are focused on is the value of your collateral. That is why they are able to process your application more quickly. Lenders would rather not spend a lot of time verifying your income and bank statements. Because the lender is able to process your application more quickly, you will be able to close on the deal sooner.
Hard money lenders offer more flexible terms than traditional lenders. They do not have to follow a standardized underwriting process like most lenders. You may also be able to make adjustments in your payment schedule if necessary.
Collateral is the most important factor that will determine whether you get approved. It does not matter if you have a foreclosure or other negative items on your credit report. You can still get approved.
When Does it Make Sense to get a Hard Money Loan?
Hard money loans are a good option for people who are in need of a short-term solution. Many people who flip houses get a hard money loan. The reason that they use hard money loans is because they will only have the property for a short amount of time before they fix it up and sell it. Most fix-and-flip investors will fix the property, sell it and pay off the loan within one year.
You can get a hard money loan for a property that you intend to stay in. However, you will probably have to refinance it in order to get a better loan.