Property ownership of all kinds has paved the road to wealth for millions of people. While it’s almost always a worthwhile investment, financing it can be a real challenge for investors and some kinds of borrowers.
Enter the world of hard money loans. These are ideal financing vehicles for non-standard property purchases. Sometimes these loans are called:
• Bridge loans that offer short-term financing until a conventional mortgage is in place.
• Construction loans that fund building a home or other structure.
• Fix-and-flip loans make funding available for property flippers to rehab speculative purchases.
• Owner-occupied loans are geared toward people who can’t get a mortgage through a conventional lender.
• Investments outside of real estate can be funded with hard money loans as well.
What Are Hard Money Loans
Unlike a mortgage that is secured by the property and your ability and likelihood of repayment, hard money lenders don’t always consider your likelihood of paying the loan back. They secure your collateral and adjust the interest rate based on the risk you pose.
Unlike banks or mortgage lenders, hard money lenders aren’t large institutions and not subject to all the regulations that banks are. They’re generally a group of investors looking for profitable opportunities. They are subject to usury laws, which vary state-by-state, as well as the Dodd-Frank guidelines for loan limits.
What Are the Benefits of Hard Money Loans
Businesses turn to these loans when they need:
• Financing for a project or purchase that a conventional lender wouldn’t be able to tackle.
• Quick financing. The mortgage process can take weeks or months, but a hard money loan takes days instead. In a sellers’ real estate market, time is everything. The first bidder to put up the money gets the property.
• Financing with poor credit. Hard money lenders either don’t consider your credit or pay much attention to it. Instead, they base their decisions to fund on the quality of the property or investment.
Hard money investors are more interested in the quality of the investment or project than your credit rating, which speeds up the loan processing. You may be able to get the funding within 48 hours of applying. You won’t lose a lucrative opportunity while you wait for loan approval.
Loan Terms and Repayment
When you’re buying real property, the lending group will probably require an appraisal and possibly an inspection. Their primary concern is the property itself and if there are defects beyond what you’ve reported, they may not be as willing to lend.
The term of the loan is usually short, and the loan period is tailored to the project. It could run from six months to a year or more. It depends on the property or endeavor. The lender will probably charge you points for issuing the loan, paying it off, or even accepting the monthly payments.
Unlike a mortgage where you make a principal and interest payment monthly, you’ll probably make just monthly interest payments with hard money financing. At the end of the term, you’ll have to make a balloon payment, which consists of the loan principal along with any unpaid accrued interest. Regardless of how you pay back the loan, be sure you can make all the payments on time.
Downsides of Hard Money Loans
These loans are of a short duration and almost always have high interest rates. Think of them as credit cards with high limits. The riskier the project, the higher the interest rates.
Besides the cost of these loans, there are a few other situations where you should avoid them.
• If you’re buying a property in a down market, it may take longer than the loan term to resell it, leaving you responsible for the entire loan amount. You may have refinance if you’re still holding the property.
• The interest rates are high. If you can get a lower interest mortgage loan, you’ll save money.
When you need money fast, look to a reputable hard money lender for a solution. Be sure that they have a real estate license in your state and are clear about every aspect of the loan terms.