About Hard Money Loans
As an asset-based real estate loan, hard money loans consider the value of your property, as opposed to your ability to pay. Not that your financial standing is insignificant, it just isn’t necessarily the determining factor. In fact, hard money lenders are private individuals and organizations that consider the merits of each loan as opposed to following a checklist of requirements. This is partially why there’s a greater chance of being approved.
Fix-and-flip, bridge, construction and owner-occupied are examples of hard money loans. A fix-and-flip loan is for buying and fixing a rehab property to resell, and then pay off the loan. A bridge loan can work if you want to buy a property now and then refinance or resell it as soon as possible. You can also use a bridge loan to buy a property prior to getting the cash for a down payment from selling a property that you presently own. A construction loan will let a real estate developer get started on a new construction project that they intend to refinance or sell immediately.
While the previously mentioned loans are for real estate investment purposes, there are a handful of hard money lenders that offer owner-occupied consumer loans. However, a large percentage of them won’t get involved with consumer loans because of the additional regulations involved, such as Dodd-Frank. There would also be certain licensing requirements.
A Closer Look at Hard Money Loans
One of the reasons real estate investors find hard money loans appealing is because the application process is easy and the response time can be less than a week, in some cases. Generally speaking, borrowers must have a cash down payment that’s based on the Loan-To-Value (LTV) ratio or the After-Repair-Value (ARV) ratio.
Hard money loans are notoriously short term, typically from 12 months to several years. Since the interest rates tend to be high, you wouldn’t want a long-term hard money loan. Monthly payments for hard money loans are often interest only instead of principal and interest. There might even be an option to have zero payments until the end of the term when you make the balloon payment. The balloon payment will include bringing the loan to a zero balance by paying the principal, remaining interest and all fees.
How Hard Money Loans Are Different
There are few similarities between hard money loans and traditional bank loans. Hard money loans have high interest rates, which means you’ll pay more in interest charges than you would for a traditional mortgage. Sometimes there are a lot of fees, such as origination and underwriting charges, among others. As previously mentioned, the loan period is very short, typically not more than a few years. There’s also a possibility that you could have a hard time with refinancing because of traditional mortgage lending requirements. Another area that might be concerning to some is that there is little government oversight of hard money loans.
Despite the cost of hard money loans, there are advantages that sometimes mitigate concerns. Hard money loans provide you with fast money, the requirements are relaxed and the terms are flexible. These are all benefits that can enable you to access real estate investments when there is no other option