If you’re in the market for a loan product that fits your unique needs, a hard money loan might be the solution. There are advantages and disadvantages of hard money loans and the best thing you can do is make an informed decision.
What Are Hard Money Loans?
Hard money loans are for real estate purposes and are made based on the value of your property as opposed to your ability to pay back the loan. These loans are offered by private individuals and organizations and the requirements are less stringent. There are different types of hard money loans, such as fix-and-flip, bridge, owner-occupied and construction loans.
With a fix-and-flip loan, you can purchase and fix up a rehab property, which you can sell and pay off the loan. Bridge loans let you buy a property that you intend to resell or refinance. Owner-occupied loans are obviously for the purchase of a home in which you intend to live, and they are an option when you don’t qualify for other loan types. A real estate developer who wants to start a new construction project can get a construction loan and either refinance or sell the property right away.
How Hard Money Loans Work
For the most part, hard money lenders grant loans for investment purposes, which means it’s difficult to get a loan for your private home. While some lenders issue loans to consumers, it’s more difficult because of the additional regulations for consumer loans. For instance, lenders will have to satisfy Dodd-Frank regulations, which ensures the debt-to-income ratio is within the guidelines. They will also have to comply with additional licensing requirements.
The loan period for hard money loans is usually about 12 months, but it can be a few years. One of the benefits of a hard money loan is that you only make monthly interest payments instead of principal and interest payments. There are even some instances when you are not required to make any payments at all. This is one of the reasons why hard money loans can be appealing. Another reason is because the financing process is streamlined and fast. It can take less than a week to fund the loan.
As far as the amount of cash that you’ll need, it depends on the Loan-To-Value (LTV) or After-Repair-Value (ARV) ratio. When it’s time to paying the loan off, you’ll do that in the form of a balloon payment that covers the principal, interest and fees.
How Hard Money Loans Are Unique
Hard money loans are drastically different from traditional bank loans. For instance, hard money loans have high interest rates and an extremely short repayment period. It’s also much easier to get approved for this type of loan. Hard money lenders are more likely to approve a loan if you have poor credit, a bankruptcy or a foreclosure. The reason why is because they are more interested in the collateral for the loan, as well as the LTV ratio. Banks are more concerned with your income and credit rating.
Generally speaking, the reason people get hard money loans is because they can get money quickly, the requirements are easier to meet and the terms are flexible. The downside of hard money loans includes high interest rates and fees. There’s also the issue of getting a short-term loan that can be difficult to refinance. Despite the potential challenges, people often find that the advantages of getting a hard money loan outweighs the disadvantages.