About Hard Money Loans
Since there is no such thing as a one-size-fits-all mortgage, hard money loans often work for real estate investors because their unique needs and situations are considered. Hard money lenders are individuals and investment firms that provide real estate loans based on the value of your property as collateral. While traditional mortgage lenders will focus more on your ability to repay by assessing your income and credit score, hard money lenders don’t necessarily focus on those factors since collateral involved. It’s an entirely different philosophy and lending method.
There are different types of hard money loans that can accommodate your needs. You can use a bridge loan to buy a property fast and either resell or refinance it. You can also use the bridge loan to buy a property before actually getting the cash down payment from selling a property that you currently own. Perhaps not surprising, fix-and-flip loans let you purchase a fixer-upper that can be resold, and then the loan paid off in a short amount of time. Construction loans let real estate developers start a new construction project, then sell or refinance the property.
Although some hard money lenders offer owner-occupied loans, most do not because of the regulations involved in consumer lending products, such as Dodd-Frank and licensing requirements. However, if you’re interested in an owner-occupied loan, there’s a chance that you might find a hard money lender, especially since they are private firms and individuals who look at loans on a case-by-case basis.
How Hard Money Loans Work
One of several reasons why real estate investors like hard money loans is because the application process is fast and often free of any hassles and complications, unlike traditional mortgage loans. While each hard money lender has their own set of criteria, borrowers will typically be required to have a cash down payment that’s based on the property’s Loan-To-Value (LTV) ratio or the After-Repair-Value (ARV) ratio.
Hard money loans are short-term loans – often just one to a few years. As opposed to making monthly principal and interest payments, you may only be required to make monthly interest payments. In fact, there are some instances where you will not be required to many any payments at all until the loan matures and the balloon payment is due. The balloon payment is a final payment that consists of the principal, all remaining interest and any fees.
Is a Hard Money Loan Right for You?
Let’s face it, hard money is often expensive. There are also other considerations that might be concerning. These loans have high interest rates, high fees, short terms and the potential of problems when it’s time to refinance because of the “seasoning” period. There’s also the issue of little government oversight, which means you have to be careful about the lender that you choose.
Despite the potential downsides of hard money loans, many real estate investors and developers use hard money loans because its quick money with flexible terms and far more lenient requirements than traditional mortgage loans. From an investment standpoint, hard money loans provide the financial resources that might not otherwise be available when an investment opportunity is presented. To that end, hard money loans can be the solution that you’re looking for.