If you are unable to get approved by a traditional mortgage lender and you need to find another option, a hard money loan might be the solution. Hard money loans are offered by private individuals or investment firms that take a different approach to lending. Keep reading to learn more about hard money loans so that you can determine if they are a good option for you.
About Hard Money Loans
Hard money loans are real estate loans and they are approved based on the value of your collateral as opposed to other factors considered by traditional mortgage lenders, such as your ability to repay. Not that your financial standing isn’t important, it just isn’t the primary consideration. In fact, hard money lenders have the autonomy to look at each loan on a case-by-case basis to make a funding decision. It’s a process that involves far less red tape than bank loans.
There are different types of hard money loans, such as fix-and-flip, bridge, owner-occupied and construction. Each type is obviously for different purposes. Bridge loans let you buy a property fast, then refinance or resell it. You can also use it to buy a property before getting the cash down payment from the sale of a property you already own. Fix-and-flip loans are just that – it’s for buying a property, fixing it up and reselling it, at which point you pay off the loan. There are also new construction loans and owner-occupied loans.
In the hard money lending arena, owner-occupied consumer loans are less common because they require compliance with far more regulations than loans for investment properties, such as Dodd-Frank. Hard money lenders tend to steer clear of lending that causes regulatory complications. They also avoid consumer loans because of certain licensing requirements. Nevertheless, there are still some hard money lenders who will provide owner-occupied consumer loans.
How Hard Money Loans Work
One of the reasons why hard money loans are appealing to real estate investors is because the application process is easy and fast, sometimes less than a week. Quick financing can mitigate some of the less desirable aspects of hard money loans in the mind of some investors. Generally speaking, hard money loans require you to put cash down, and the amount is based on your property’s Loan-To-Value (LTV) ratio or After-Repair-Value (ARV) ratio. Just keep in mind that every hard money lender has different criteria.
Hard money loans have a short term that’s usually 12 months, but can be several years. Instead of making monthly payments to the principal and interest, you will typically make interest-only payments. In fact, there are some instances where you don’t make any monthly payments. Instead, you simply make the balloon payment at the end of the loan term. The balloon payment would consist of the entire principal, any unpaid interest and all fees.
Is a Hard Money Loan Right for You?
If we lived in a world where everyone could get the money they need through traditional bank loans, hard money loans would not exist. When making a decision about whether this loan product is a good option, you’ll need to assess the pros and cons. There is usually no way around the fact that hard money loans have high interest rates, a lot of fees and a very short term. They can also be hard to refinance because of the “seasoning” period of traditional mortgage loans, which requires a minimum length of time before you can refinance. Obviously, these issues should be avoided, if possible.
On the flip side, there are situations where a hard money loan is beneficial because it provides access to quick money, the requirements are less rigid and the terms are flexible. This means you will have the money that you need for investment opportunities that arise.