Hard money loans are real estate loans that can serve as a solution for people who do not qualify for more traditional mortgages. While it would be great if banks always had a loan product for which you qualify, that’s not how it works. Subsequently, there are times when you need a non-traditional solution.
The increasing popularity of hard money loans is partially due to the fact that there is no one type of mortgage that fits everyone, and sometimes a real estate investor will have an investment opportunity that requires financing, but they simply do not meet bank requirements. There are different types of hard money loans, such as bridge loans, fix-and-flip loans, construction loans and owner-occupied loans. Here are more details about these options:
Bridge Loan: Enables you to buy a property that you plan to resell or refinance. You can also buy a new property prior to getting the cash you need for a down payment from the sale of a property that you currently own.
Fix-and-Flip Loan: Allows you to buy a rehab property and then quickly fix it up to resell it, at which point you will pay the loan off.
Construction Loan: Specifically for real estate developers who need to get started on a new construction project. This type of loan usually involves refinancing or selling the property right away.
Owner-Occupied Loan: This loan is for the purpose of buying real estate and it’s appropriate for consumers who cannot qualify for other kinds of financing.
How Hard Money Loans Work
Instead of your ability to pay, the approval process for hard money loans is based on the value of your property. The lenders of hard money loans are firms and individuals who make decisions about funding loans on an individual basis. Many hard money lenders will not fund a loan for a purpose other than real estate investing. This is partially because consumer loans necessitate compliance with far more regulations, which often complicates the lending process.
One way in which hard money loans are different than traditional loans is that you have to repay them over a short period of time, which is often 12 months, but can be a few years. What many investors find attractive about these loans is that the monthly payments are interest only instead of principal and interest. The financing process for hard money loans is usually less than a week and the application process is streamlined.
There are other considerations, such as the fact that you’ll have to bring money to the table. While it varies from one vendor to the next, most require you to have an amount of cash that’s contingent upon the Loan-To-Value (LTV) or After-Repair-Value (ARV) ratio. For instance, if you need $50,000, you would need to have $10,000 in cash. When the time came to pay the loan back, you would make a balloon payment that covered the principal, interest and any fees.
Pros and Cons of Hard Money Loans
Some of the main benefits of hard money loans is the fact that you can get access to money quickly, the requirements are less stringent, the terms are often flexible and you have the financial resources needed for an investment opportunity.
Some of the challenges associated with hard money loans is the fact that interest rates are high, there is little oversight, fees can be high, the loans are short term and it can be difficult to refinance. Despite these potential issues, many investors find them helpful in specific situations.
The people who tend to appreciate hard money loans are those who are unable to get other types of financing, need to get their hands on money quickly and have a low credit score.