About Hard Money Loans
Hard money loans are provided for the purchase of real estate and the value of your property as collateral is the basis of the loan. While the entirety of your loan application is considered, it’s not like traditional mortgage loans where your income and credit scores are the primary determining factors in whether your loan is approved. Hard money lenders are private firms and individuals that assess the entirety of your application as opposed to just following strict guidelines without considering your situation. There are different types of hard money loans that meet different needs.
Types of Hard Money Loans
A bridge loan enables you to buy a property, then resell or refinance it. This type of loan is also for buying a new property before getting the cash for a down payment through the sale of a property that you already own. A construction loan enables real estate developers to start a new construction project and refinance or sell it right away. You can use a fix-and-flip loan to buy and fix up a rehab property, then resell it and pay off the loan. The owner-occupied loan is offered by a small number of hard money lenders because it’s a consumer loan and a lot more regulations are involved.
How Hard Money Loans Work
Many real estate investors appreciate the fast and easy application process for hard money loans. It can take less than a week to complete the lending process. Generally, borrowers are required to have a cash down payment that’s determined based on the Loan-To-Value (LTV) ratio or the After-Repair-Value (ARV) ratio.
Hard money loans are for a short period of time, typically 12 months to several years. Instead of monthly principal and interest payments, there’s a chance that you will only have to make interest payments. There’s even a possibility of zero payments until the balloon payment is due. The balloon payment will include the entire principal, the remaining interest and any fees that have been added to the loan.
Is a Hard Money Loan Right for You?
Whether a hard money loan is right for you depends on your situation. You will need to consider the pros and cons. The benefits of a hard money loan include fast access to money, flexible terms and lenient requirements for approval. These are not characteristics of traditional mortgage loans. With a hard money loan, you are more likely to have the financial resources that you need to invest in real estate.
Some of the downsides of hard money loans are the short terms, have high interest rates and fees. Hard money loans also have limited government oversight, which means you should be careful about the lender that you choose. There could also be an issue with refinancing as a result of traditional mortgage lender requirements to satisfy the “seasoning” period. This means you’ll have to hold the loan for a certain period of time before refinancing.
Despite the downsides, many real estate investors see hard money loans as a tool that enables them to capture more investment opportunities. The reality is that hard money loans offer a solution to a problem and can make the difference in the success or failure of a real estate investor. If you are unable to obtain a traditional mortgage loan, a hard money loan could be a good alternative.