Everyone has different needs when it comes to real estate financing, and it can be difficult to find the right loan product. This is especially true if you cannot qualify for a conventional mortgage. If you have experienced difficulties with your mortgage, then a hard money loan might be the answer to your problems.
Since hard money lenders are comprised of organizations and individuals who make decisions based on each individual application, there’s a good chance of finding one that fits your needs. Below you’ll find information that can help you make a decision about whether this type of loan is right for you.
About Different Types of Hard Money Loans
As a real estate loan, hard money loans are granted based on your collateral, instead of your ability to repay the loan. There are different types of hard money loans, such as the bridge loan, owner-occupied loan, fix-and-flip loan and construction loan, among others. The bridge loan will let you quickly buy a property to resell or refinance it. The owner-occupied loan can help if you don’t quality for other financing options. The fix-and-flip loan is for the purpose of buying and rehabbing a property so that you can sell it, at which point you pay back the loan. Construction loans are for real estate investors starting on a new project, who intend to refinance or sell the property.
What’s Involved in a Hard Money Loan?
For the most part, hard money loans are not issued for purposes other than an investment, which means you are less likely to get approved for a home if you plan on living there. However, there are some instances when hard money lenders fund loans to consumers, but that becomes a more complicated matter since there are more regulations involved.
The timeframe for hard money loans is usually 12 months, but sometimes a couple of years. During this period you’ll only be required to make interest payments instead of payments on both the principal and interest. Interest-only payments, coupled with fast financing are reasons why hard money loans are appealing to some real estate investors.
Generally speaking, hard money lenders will require to you to bring cash to the transaction. The lender might require to you provide cash that’s based on the Loan-To-Value (LTV) ratio. In some instances, the requirement is based on the property’s After-Repair-Value (ARV) ratio. For instance, if you want to buy a house for $150,000, you may be required to have $30,000 of your own cash. Hard money loans are paid off in a balloon payment, which will cover the principal, any fees that may have been added and the interest that’s remaining.
How Hard Money and Traditional Bank Loans are Different
While both hard money loans and traditional bank loans provide you with the tools necessary to purchase property, they are quite different. Since hard money loans are provided by organizations and individuals, the terms are extremely different than traditional bank loans. For starters, the repayment period is very short and interest rates are high.
Perhaps one of the biggest differences is that hard money loans are easier to obtain. Essentially, you’re more likely to get approved for a hard money loan because the lenders are more willing to overlook poor credit, bankruptcies, foreclosures and anything thing else that would usually preclude you from getting a bank loan. Hard money lenders are generally more concerned with the value of the real estate property that will be used as collateral instead of your income and credit rating.
However, if you are approved for a loan that’s for the purpose of buying your own home, then the lender must satisfy Dodd-Frank regulations, which requires them to verify your ability to pay back the loan by assessing the debt-to-income ratio.
There are many reasons business owners take out commercial construction loans. As your business grows, you may need to make expansions and improvements that typically come at a high cost. Many businesses are not able to handle the financial obligation of expansion by paying up front. In these circumstances, a commercial construction loan can be beneficial.
Reasons You may Consider a Commercial Construction Loan
A commercial mortgage is for business owners who want to purchase existing property. Those who want to renovate existing office space will need to apply for a commercial loan, and individuals who want to build a new office space from the ground up may also want to apply for a commercial loan.
It can cost thousands to millions of dollars to construct a new building or administer renovations. Many businesses that are still growing probably won’t have the cash to make payments up front, which is when s commercial loan can be helpful. A commercial construction loan pays for land development, labor, and materials throughout the construction process.
How do These Loans Work?
Commercial loans differ from other loans. With most loans, the full amount will be disbursed up front in one lump sum. When the borrower receives the funds, he or she is then responsible for making scheduled payments over a certain period of time. Many commercial loans have a repayment period of at least 10 years.
A commercial construction loan does not disburse the full amount of the loan up front. The lender and borrower will work with each other to establish a draw schedule. As the construction project reaches new developments and milestones, partial amounts of the loans will be released. An example may include the first draw taking place at the clearing of the land with the second draw taking place when the foundation is set. In most circumstances, the lender will have an inspector visit the construction site to confirm that the milestone is completed.
Furthermore, you only pay the interest on the loan proceeds that have been disbursed with a commercial construction loan. For instance, if your total loan is $500,000 with only $100,000 dispersed, then you will only pay interest on $100,000.
After the project is completed and the remainder of the loan is due, a borrower can choose to apply for a commercial mortgage. This is an alternative to making one large payment when the project if done.
A down payment is usually required because a commercial construction loan is a high-risk loan. A down payment will take some of the risk off of the lender. In most circumstances, a down payment will cost about 10%=30% of the entire project.
What Qualifies for a Commercial Construction Loan in Texas?
There are several factors that must be considered to determine eligibility for a commercial construction loan in Texas. Typically, borrowers will need to have high-credit scores because commercial construction loans are high-risk. Although credit requirements will vary from lender to lender, many borrowers will need to have a credit score that is at least in the upper 600s.
Another factor that will be considered is debt-to-income ratio. This will show the relationship between your income and the debt of the business, which is usually calculated on a month-to-month bases. Most lenders will look for an income ratio that is no higher than 43%.
When you are applying for a commercial construction loan, you will need to show the lender project plans. This may include a plan of the designs and specs of the project. You may also need to show your estimated project cost, which includes materials, contractor fees, and mother expenses.