About Hard Money Loans
As a loan for the purpose of buying real estate, hard money loans are made based on the value of your collateral, which is your property. Hard money lenders are unique in that they are private individuals and companies that make loans based on the specific needs of the applicant. In other words, unlike banks that follow strict rules and guidelines, hard money lenders can assess your unique situation. Banks are mainly interested in your ability to repay the loan and hard money lenders focus on your collateral – for the most part.
There are different types of hard money loans. For instance, a bridge loan can help you buy a property if you intend to refinance or resell it. You can also use this loan to buy a property before you have the cash down payment from the sale of a property that you already own. Then there’s the fix-and-flip loan that enables you to buy a property, fix it up quickly, resell it, then pay the loan off. Construction loans let you start a new construction project and either refinance or sell the property right away.
While a small percentage of hard money lenders provide owner-occupied loans, most do not because of the many regulations that must be followed for consumer loans. The Dodd–Frank Wall Street Reform and Consumer Protection Act, as well as certain licensing requirements tend to complicate the hard money loan process. If you’re interested in an owner-occupied loan, there is still a possibility that you will find a hard money lender that offers a solution.
How Hard Money Loans Work
The turnaround time for a hard money loan is usually fast, sometimes in less than a week. Borrowers are often required to have a cash down payment, which is determined based on the Loan-To-Value (LTV) ratio or After-Repair-Value (ARV) ratio. It also depends on the hard money lender – the criteria varies from one lender to the next.
Perhaps one of the most significant ways in which a hard money loan is different is the term of the loan, which is typically from 12 months to several years. The payments are often different than traditional bank loans where you make equal principal and interest payments. Instead, you may only need to make interest payments. In fact, there are even loans where you don’t make any payments at all until the loan matures, at which point you make a balloon payment. The balloon payment will be comprised of the principal, all remaining interest and any fees.
Is a Hard Money Loan a Good Solution?
Hard money loans are often obtained when a person does not have another option, needs money right away or has a low credit score. Even though hard money loans have high interest rates, short terms and high fees, they still work for some people. Real estate investors use hard money loans as a tool because they appreciate the benefits. Fast money, flexible terms and relaxed requirements provide them with the money needed to increase their investments.
There are times when it would be prudent to avoid hard money loans. For instance, if you’re in a buyers market, then it might be difficult to sell the property fast after fixing it up. If there’s a chance that a less expensive loan is available, then you should certainly pursue it. As mentioned, sometimes there is no other option, which can make a hard money loan a good deal.