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.