A hard money loan is a type of real estate loan used primarily by real estate investors. Unlike traditional banks which use your credit rating and your financial situation to determine how much money to loan to you, hard money lenders focus on the value of the real estate that you use as collateral to get the loan. There are many great reasons that people choose to go with hard money lenders, but there are certain facts about the loans that you should know before applying for them.
The Basics of Hard Money Loans
A hard money loan is used by real estate investors to fund the purchase of a property that is being used for investment purposes. The lenders are usually individuals or organizations who focus solely on lending money for these types of purchases. Hard money loans are usually given for a short. of time, rarely for more than a few years and most usually for a 12-month term. Hard money lenders usually don’t require you to make monthly payments towards the principal on the loan, and they often allow you to forgo monthly interest payments as well. Hard money loans are usually repaid by the borrower at the end of the loan period In one large balloon payment when the investment property has been sold. That balloon payment covers the principal, any remaining interest and any of the fees. Once paid in full, your loan will be settled.
Fact That Make Hard Money Loans a Good Choice
There are many reasons when getting a hard money loan makes the absolute best sense. Those reasons include the following:
You get the money fast.
Unlike traditional loans where it could take a long time to receive the cash once you go through the extensive application process, hard money loans usually take a week or less for you to get the cash in hand. This is extremely important for people who need to hop quickly onto fast-moving real estate deals or once-in-a-lifetime purchases that they may be unable to partake in otherwise.
There are less stringent credit requirements.
Traditional lenders will look hard at your credit rating, keeping an eye out for things like bankruptcies and foreclosures. Hard money lenders are less concerned with all of that. What they focus on is the value of the collateral you’re bringing to the table. If you’ve got the collateral and that collateral has value, they will be there.
The terms are a lot more flexible with hard money loans.
Working with individuals and organizations has its advantages. Because they’re not traditional banks and you’re dealing with them directly, they’re more likely to work with you on terms that work to your advantage. They can create custom loans that work for your particular situation.
You’ll be able to become a part of more real estate deals.
Because you’ll be able to access cash quickly with a hard money lender, it’ll make it so much easier for you to become involved with hot real estate deals. Having access to these deals will help grow your business.
Thing To Look Out for With Hard Money Loans
Although there are many great reasons to get a hard money loan, there are certain things that would make them a bad option for certain Borrowers.
They tend to have high interest rates.
Interest rates for hard money loans frequently rise up into the double digits. While this can be an issue for some people who are in tight financial situations, it usually isn’t an issue for people who are only taking out loans for a very short period off time. Remember, the loan is only being taken out for one to three years instead of the 15 to 30-year periods for traditional loan.
There’s less oversight.
The government extends very little oversight on these types of loans, making it very easy for an inexperienced borrower to get caught up with an unscrupulous lender. It is extremely important that you do your homework so that you know the lenders that you’re dealing with.
The fees can be high.
Many hard money loans have quite high fees, including those like underwriting fees, early payment penalties and origination fees. Although these are usually paid at the end of the loan when the balloon payment is due, it does increase that final payment.