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The reality of mortgage lending is that some people do not qualify for conventional loans. Quite frankly, there are often stringent requirements that do not accommodate everyone’s needs. Fortunately, hard money loans can serve as a solution if you need a loan for the purchase of real estate.
When the topic of hard money loans arises, there are often questions about whether it’s a good option. The information below sheds light on hard money loans in order to help you make an informed decision about this mortgage loan product.
About Hard Money Loans
Hard money loans are for the purpose of purchasing real estate. An interesting aspect of these loans is that they are made based on the value of your collateral. This is different than conventional loans that focus more on your ability to repay. Hard money lenders are private firms and individuals who look at each application on its own merit as opposed to using a standard checklist of requirements. The fix-and-flip loan, bridge loan, owner-occupied loan and construction loan are all examples of hard money loan products.
A bridge loan is a good option if you plan to buy a property, then resell or refinance it. This type of loan is also an option if you want to buy a new property, prior to getting cash for a down payment from selling a property that you currently own. As the name implies, a fix-and-flip loan is for buying a fixer-upper that you can sell, and then pay the loan off. The owner-occupied loan is simply for consumers who can’t qualify for other financing options. A construction loan enables a real estate developer to start a new construction project, then refinance or sell it quickly.
Although there is a small percentage of hard money lenders that offer owner-occupied loans, the majority do not because they require adherence to far more regulations, such as the Dodd–Frank Wall Street Reform and Consumer Protection Act, as well as licensing requirements with the National Multistate Licensing System & Registry.
How Hard Money Loans Work
Part of the appeal of hard money loans is the fact that the application process is fast, sometimes less than a week, and it isn’t complicated like that of other loan types. This is a benefit that real estate investors appreciate, for obvious reasons. Generally speaking, you will need cash for hard money loans. The amount required will be a function of the Loan-To-Value (LTV) ratio or After-Repair-Value (ARV) ratio.
One of the most distinct features of a hard money loan is the term, which is usually 12 months, but sometimes a couple of years. Instead of making monthly principal and interest loan payments, borrowers make interest only payments. There’s even a possibility that you won’t have to make any payments until you pay the loan in full. Hard money loans are paid off at the end of the term in a balloon payment that includes the principal, the remaining interest and all of the fees.
How Hard Money Loans Are Unique
When you look at hard money loans and compare them with traditional bank loans, you’ll find many differences. While they both offer loans for real estate and may have similar underwriting practices, there aren’t many other commonalities. The repayment period for hard money loans are very short, interest rates are high, there are often a lot of fees and there’s a lack of governmental oversight. There might also be issues with refinancing down the road as a result of traditional mortgage loan requirement.
While some aspects of hard money loans can seem undesirable, there are a good number of benefits to consider. Namely, you can receive the money that you need quickly, the terms are flexible and the requirements are lenient. These benefits often make hard money loans worthy of consideration.