Hard money lenders are private individuals and companies. As lenders, they are unique because they assess each loan application and make a decision based on the individual situation as opposed to standard requirements or a rigid checklist. This means they are often more willing to provide a custom loan product that fits your needs.
Types of Hard Money Loans
The decision-making process for hard money loans primarily involves an assessment of your collateral as opposed to your ability to repay the loan, which is distinctly different from bank loans. There are a variety of different kinds of hard money loans, such as the bridge loan, fix-and-flip loan, owner-occupied loan and construction loan.
The bridge loan will let you buy a property that you intend to resell or refinance. The fix-and-flip loan is a good option if you want to buy and fix up a property to sell, at which point you will repay the loan. There’s also the less common owner-occupied loan that’s for consumers who are unable to quality for other types of loans. The construction loan is for real estate investors who are starting on a new project and intend to either refinance or sell the property.
How Hard Money Loans Work
Hard money loans are primarily for real estate investing, which means the owner-occupied loans are less common, although they are provided by some hard money lenders. It’s been reported that 90 percent of hard money lenders do not offer consumer loans in some states. Hard money lenders shy away from owner-occupied loans because they are more complicated as a result of different regulations for consumer loans, such as the Dodd–Frank Wall Street Reform and Consumer Protection Act and certain licensing requirements.
The loan term for hard money loans is typically 12 months, but sometimes the term can be a couple of years. A benefit of hard money loans is that you are only required to make monthly interest payments instead of monthly payments on the principal and interest. Interest only payments, coupled with fast financing are two of the reasons why borrowers find hard money loans appealing.
Typically, hard money lenders require you 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. For example, if you want to purchase a property for $150,000, you might be required to put $30,000 down. Each hard money lender has different criteria. When it’s time to pay off the loan, you’ll make a balloon payment that will cover the principal, any remaining interest and all fees.
Hard Money Loans versus Bank Loans
Perhaps the only similarities between hard money loans and traditional bank loans is that they are used for real estate and often have similar underwriting standards. Otherwise, they are very different mortgage loan products. Hard money loans are unique in that the repayment period is short, interest rates are high and they can sometimes have hidden fees. These are some of the undesirable aspects of hard money loans.
There are beneficial aspects of hard money loans, such as the relative ease of getting approved. Hard money lenders often overlook poor credit, foreclosures, bankruptcies and other challenges that usually preclude a person from getting a traditional bank loan. Hard money lenders tend to focus more on the value of your collateral as opposed to your credit rating and income. Yet another reason why a hard money loan is sometimes an attractive option.