One of the most common reasons people don’t qualify for traditional mortgage loans is because of issues with credit and income. A hard money loan is actually a solution to that problem because it’s an asset-based loan. It would be great if banks offered a alternative to every mortgage problem, but that’s not how the world works. Real estate investors have come to appreciate the speed and ease of hard money loans. Here are more insights on this topic.
About Hard Money Loans
There are a variety of different types of hard money loans, such as the bridge loan, fix-and-flip loan, owner-occupied loan and construction loan. Hard money loans are based on the value of your property as collateral. Your credit and income are much less of a consideration in the world of hard money because it’s mostly about the collateral.
Your ability to pay the loan back is important, but hard money lenders know they have a recourse should things go south. This is unlike traditional mortgage loans where poor credit and questionable income is a deal breaker. In fact, hard money lenders may even forgive bankruptcies and foreclosures. Generally speaking, they are individual investors and firms that make decisions on a case-by-case basis, with great leniency.
More About Hard Money Loan Types
Real estate investors need money for different reasons and there are loan types to accommodate their needs. For starters, a bridge loan lets you buy a property fast, then resell or refinance that property. You can also use a bridge loan to buy a property before you get a cash down payment from selling a property in your real estate portfolio. The nature of a fix-and-flip loan is evident by the name; you buy, fix and flip the property, then pay off the loan. A construction loan is used by real estate developers for new construction projects that will be sold or refinanced.
What happens if you want to live in a property and need a hard money loan? There is an option for that, but it’s less common. It’s an owner-occupied loan for consumers who can’t qualify for traditional mortgage loans. Hard money lenders tend to shy away from owner-occupied consumer loans because there’s a lot of red tape and regulations involved. Nevertheless, there are some lenders who offer this loan type.
A Closer Look at Hard Money Loans
If you have ever participated in the mortgage loan process, you might find it hard to believe that the application process for hard money loans is sometimes less than a week. Specially, there’s a chance that you could apply for a loan on Monday and get funded by Friday. The loan process is not just fast, but it’s also void of the common hassles of bank loans.
You will likely be required to put money down for a hard money loan and the amount will depend on the Loan-To-Value (LTV) ratio or After-Repair-Value (ARV) ratio. Loan terms are typically one to several years, though one year is common. As opposed to making monthly principal and interest payments, there’s a chance that you will only make interest payments. In fact, you may not be required to make any payments at all, until the loan matures and you make the balloon payment. Just keep mind that it depends on the lender. That final payment includes the principal, interest and fees.
Is a Hard Money Loan a Good Solution?
If you are able to secure a traditional mortgage loan, then you probably won’t need a hard money loan. If you can’t, then you should weigh the pros and cons. While a hard money loan has high interest rates, many fees and a short term, it also provides you with money quickly. For some real estate investors, a hard money loan is great tool to be use when needed.
The term hard money refers to a method of borrowing that does not involve a traditional mortgage. This option came about because of a need that still exists today. If you find yourself seeking a loan for the purchase of real estate, but you have not been able to qualify, then a hard money loan might be the right solution. The information below sheds light on how these loans work.
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.