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Pasadena Hard Money Loans: Advantages and Drawbacks
As you explore your options for financing a project or purchase, it helps to consider every possible strategy. One that you may have overlooked is the hard money loan. As with any type of financing, this solution may be ideal for you, depending on your situation. Here are some of the pros and cons you should know about these loans before making a decision about applying.
What is a Pasadena Hard Money Loan?
A hard money loan is an asset-based form of financing. This simply means that you are pledging an asset as security for the loan. Typically, you retain control of that asset and may use it for the loan duration. In the event you default on the loan, the lender has the right to seize the asset and use it to settle the remaining balance. Once you pay off the loan in full, the lender relinquishes all claims to the asset, and you are free to retain it, sell it, or do whatever you like with it.
Your Credit and Receiving a Pasadena Hard Money Loan
One of the advantages of Pasadena hard money loans is that lenders do not place much emphasis on your credit score. Since these loans are often offered by private investors or non-institutional financing companies, they use a different set of qualifications that you would find at a bank or credit union. What will be important is the market value of the asset you wish to use as security for the loan.
It’s not unusual for hard money lenders to require what is known as real property. Real property is usually identified as property that is fixed in place and is likely to remain so. For example, your home and the land where it’s built would qualify as real property. If you own undeveloped land, it would also be acceptable as security.
You may find that some lenders will accept other types of property as collateral. Assets like artwork, stock shares, or jewelry may be acceptable. The only way to know for sure is to ask in advance what sort of assets the lender is willing to accept.
What About Interest Rates?
Generally speaking, the interest rates on hard money loans tend to be higher than on more traditional loans. This has to do with the amount of risk the lender is taking on in order to fund your investment property. There is always the possibility of real property being damaged during some sort of natural catastrophe. The fact that the lender does not require a minimum credit rating like other lenders also increases the risk.
Does Loan Duration Make a Difference?
Many entrepreneurs use Pasadena hard money loans when they expect to pay off the debt in a relatively short period of time. Hard money is a form of short term financing, also known as bridge funding, which allows you to quickly purchase a property. Typically, hard money should be considered a form of short term financing. Hard money has a higher than average interest rate, and thus – if held for a long term period of time, can be super expensive. Many real estate investors use hard money first, to buy the property, then refinance the property with a traditional lender – or sell it.
What does Delancey Street Want?
Delancey Street is a top rated hard money lender that focuses exclusively on the value of your asset. Our team cares about a few things only: who you are, what you plan on doing with the property, and how you plan on repaying the loan. Ultimately, and simply put, we care about why you need the funds, and the value of the property. If we feel the property is valuable – we’ll lend against it.
When financing a real estate purchase, there are many ways to do so. While some people take out a mortgage from a local bank, others turn to private individuals and institutions to secure what is known as a hard money loan. While different from traditional mortgages in regards to interest rates, payback periods, and the application process, hard money loans offer various benefits mortgages simply cannot. However, they also come with pitfalls that can lead to trouble if they are not used in conjunction with sound financial planning.
How Do I Apply for a Hard Money Loan?
If you want to use a hard money loan to finance a real estate investment, applying for one involves knowing where to look. To get the best results and ensure you will be working with a reputable lender, turn to other investors. Since these loans provide tremendous flexibility in the types of investments for which they can be used, it is likely other investors in your area are using these loans as well, and can steer you in the direction of local hard money loan lenders.
Will I Need Collateral?
Just like any other loan, you will need collateral to secure a hard money loan. However, with these loans, the property you are wanting to purchase will act as your collateral. When trying to secure a hard money loan, the lender cares little about your past or present financial situation. In situations such as these, they are simply providing you a loan based on the property’s value. Thus, if it is valued at $100,000, the lender will probably offer you a loan in the neighborhood of $80,000, which will be based on the property’s loan-to-value ratio. If for any reason you buy the property and cannot sell it in time to pay off the loan, the lender will have the option of foreclosing on the property, or perhaps offering an extension at a much higher interest rate.
What is the Period of these Loans?
Regarding payback periods for these loans, this is one of the biggest differences between them and traditional mortgages. With a hard money loan, the payback period will be extremely short, probably no more than 12 months. Along with this short payback period, the lender will charge an interest rate well into double-digits, and will also include many fees for origination, underwriting, and as penalties for early payment of the loan. And at the end of the loan, a balloon payment will be required to ensure all principal, interest, and fees have been paid. Therefore, before signing up for a hard money loan, be sure you understand the terms of the deal, since the pressure will be on you to sell the property in time to pay off the loan.
When Should I Avoid a Hard Money Loan?
While a hard money loan can work in many situations, there are times when you are best served to look for other ways to finance your purchase. This usually involves if you are in a buyer’s market in your local area, meaning there are many properties that are not selling very fast. Since selling fast is key to making a hard money loan work for you, buying a property and still having it unsold when the loan comes due can spell problems for you and your investment. In many cases, you’ll either have to refinance or let the lender foreclose on the property. Either way, you will have lost a tremendous amount of money along the way.
If you have a solid plan in place when purchasing a property, securing a hard money loan can be quick, easy, and profitable for you and the lender, and can be the start to numerous successful real estate investment ventures.[flexy_breadcrumb]