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Though hard money loans are often fairly simple to qualify for, it is still important to take an in-depth look at this particular financing option. While these types of loans are most often used in real estate investment, there’s still a lot that many investors don’t know about hard money loans.
What You Need to Know About Hard Money Loans
There’s more to hard money loans than fast cash. Though they are an excellent alternative to more standard methods for financing, it’s important that you understand the ins and outs of hard money loans. The following questions help to explain the hard money loan process and how to qualify for a loan:
Do hard money loans always have high interest rates?
While every hard money lender is different, most of these loans do have high interest rates.
The rates reflect the level of risk that the lender is taking on. Since these private lenders in Rochester, New York are agreeing to loan an investor money without checking their ability to repay the loan, they don’t have a physical guarantee that the investor will make good on their agreement. In the case of the investor defaulting on the loan, the lender will have to spend their own money to deal with the foreclosure of that person’s property.
Additionally, the high interest rates are a casualty of the business. Lenders are out to turn a profit as well and this is a business for them. Despite all of this, many investors are fine with paying these interest rates as these loans are for short-term periods.
How do investors afford the large balloon payment?
If you’ve yet begun to research hard money loans, you may find the idea of making the balloon payment once the loan ends to be particularly alarming. With other loans, investors make multiple payments to repay the lender. This isn’t usually the case with hard money loans.
With a large balloon payment, lenders expect the investor to pay everything when the loan is due. This includes the interest, additional fees, and the loan in full. Investors options for handling this balloon payment include selling their property, extending their loan, and refinancing the loan through other financing options.
What properties should I purchase with hard loans?
Hard lenders are often open to lending money for almost any type of property. Whether you’ve chosen multifamily properties or a single residence, you can find an institution that is willing to give you a hard money loan.
Similarly, you can purchase a property with the intention of rehabbing it or you can buy one that’s is ready-to-sell. As long as you have the collateral, you likely won’t be turned away by a hard money lender.
Are hard money lenders looking for formal businesses?
If you are investing in real estate as an individual, you will find it a bit more challenging to qualify for a loan from a hard money lender. As these lenders give loans primarily to formal businesses, you’ll have to look for an individual or firm willing to loan to you. If you’d like to make the approval process as hassle-free as possible, it is ideal to go ahead and make your investing into a separate business entity.
Do I need to pick my property before applying?
Yes. Lenders base the loan amount and their final decision on the property you hope to purchase, as well as its value.
While these are just a few of the questions you may have regarding hard money loans, these answers should help you understand your financing options. Keep this guide in mind when you approach a lender about being approved for a hard money loan.
Sometime finding a loan for a real estate transaction is difficult. This is especially true when it comes to bank loans that tend to have rigid requirements. Fortunately, there are other options if you are unable to qualify for a traditional mortgage.
Hard money loans can be a viable solution if you’re experiencing mortgage issues. Below you’ll find useful information regarding hard money loans with insights to help you better understand this product so that you can make an informed decision.
About Hard Money Loans
Hard money loans are for real estate purposes and are unique in a variety of different was. For starters, instead of making lending decisions based on your ability to repay, hard money lenders primarily consider your collateral. They don’t typically follow stringent rules, but assess each case on its on merits. There isn’t just one type of hard money loan, there are several. For instance, there is a bridge loan, fix-and-flip loan, construction loan and owner-occupied loan. Here’s a bit more information about these particular options.
Bridge loan: Enables you to buy a property fast if you intend to refinance or resell it. You can also buy a new property before getting the cash down payment from the sale of a property that you already own.
Fix-and-flip loan: With this kind of loan, you can acquire a rehab property, fix it up as soon as possible, resell it, and then pay off the loan.
Owner-occupied loan: This less common loan type is for consumers who don’t quality for traditional loans and want to purchase property for personal use.
Construction loan: Real estate developers can use this loan for a new construction project if they intend to refinance or sell the property immediately.
The reason why owner-occupied loans are less common is because hard money lenders who offer this product must comply with additional regulations, such as Dodd–Frank and licensing requirements. In fact, it’s estimated that approximately 90% of private lenders in some states do not offer hard money loans for owner-occupied properties.
How Hard Money Loans Work
Perhaps one of the most unique aspects of hard money loans is the extremely short term, which is about 12 months. However, sometimes they are a couple of years. Payments made for most hard money loans are interest only, instead of principal and interest payments. There are even some loans that don’t require any payments at all, which can make this loan attractive to real estate investors from a strategic standpoint.
Hard money loans are also beneficial in that the application process isn’t complicated and usually takes less than a week. Borrowers are often required to have cash and the amount is based on either the Loan-To-Value (LTV) ratio or the After-Repair-Value (ARV) ratio. Hard money loans are paid off with a balloon payment at the end of the term. This final payment covers the entire principal, remaining interest and fees.
Is This The Right Loan For You?
Hard money loans can be attractive because, unlike traditional bank loans, lenders are often willing to accept borrowers with foreclosures, bankruptcies and bad credit. Although hard money loans might have similar underwriting standards as bank loans, they are far less concerned with your income and credit rating. Instead, the focus is on the collateral and LTV ratio.
There are both pros and cons when considering a hard money loan. The cons include high interest rates, high fees, the short payback period, lack of government oversight and possible challenges with refinancing. That’s a lot to think about. On the flip side, the pros include quick access to money, flexible terms and less rigid requirements. This could mean that you’re able to move forward with investment opportunities.