Since there’s no such thing as a standard loan the fits the needs of everyone, there are alternative solutions. In the event that you need money immediately for the purchase of real estate and you cannot qualify for a conventional loan, then a hard money loan could be a good option for you. The following information will provide an overview of hard money loans, including some of the pros and cons.
For starters, there are different types of hard money loans, including fix-and-flip, bridge, owner-occupied and construction loans. A deciding factor for getting approved is your collateral, and there is more weight placed on the property than your ability to replay. For the most part, hard money lenders are private firms and individuals who decide to fund loans based on individual situations. Let’s dig deeper into the different loan types.
Bridge loans let you buy a property that you intend to resell or refinance. With this kind of loan, you can also buy a property now and get the down payment from another property that you own and plan to sell. A fix-and-flip loan is for when you want to buy a rehab property, fix it right away, sell it, and then pay the loan off. An owner-occupied loan is for your private property and it’s a consumer loan for people who don’t qualify for other loan types. Construction loans are for new construction projects and are intended for people who will refinance or sell the property fast.
What’s Involved in Hard Money Loans
While not everyone will qualify for hard money loans because they are generally for investments, some hard money lenders will provide loans to consumers. Hard money lenders who fund private homes must comply with more rigid regulations, which can complicate matters. For instance, they must satisfy Dodd-Frank regulations and there are also licensing requirements.
The loan period for hard money loans is short, which could be as little as 12 months. However, it could also be a few years. You will make interest-only monthly payments, but there are some instances where no payments are required. One of the advantages of hard money loans is not having to make monthly payments to the principal. There’s also the easy application process and the quick financing that can take less than a week.
Generally speaking, you will need cash for hard money loans and the amount will depend on lender requirements, which is usually based on the Loan-To-Value (LTV) or After-Repair-Value (ARV) ratio. When it’s time to pay the loan off, that happens in one balloon payment at the end of the loan. This means you’ll pay the principal, interest and all fees.
Although both hard money loans and certain bank loans are for the purpose of buying property, they are drastically different. Hard money loans have a short repayment period and high interest rates. While the underwriting standards might be similar, hard money lenders will overlook poor credit, bankruptcies, foreclosures and other issues that would preclude you from getting a traditional bank mortgage. This is because banks focus more on your income and credit rating.
Pros and Cons of Hard Money Loans
Let’s start with the pros. When getting a hard money loan, you will have the advantage of receiving money fast with flexible terms. You will also find that the requirements are less stringent. Ultimately, this means that you will have more opportunities to invest in real estate.
There are downsides to hard money loans that you should consider. These loans have high interest rates, short terms and high fees. It can also be difficult to refinance hard money loans because of traditional lending requirements. Nevertheless, many people find hard money loans to be a good alternative.