Types of Hard Money Loans
Depending on a person’s needs, there are many types of hard money loans available. These include bridge loans, fix-and-flip loans, owner-occupied loans, and construction loans. Since hard money loans are mostly given to entrepreneurs and those seeking to purchase investment properties, these loans serve various purposes. For example, a bridge loan allows an investor to quickly purchase a property, then resell it or refinance it at a later date. With a fix-and-flip loan, an investor can purchase a property, make whatever repairs they wish, then sell it quickly and have the loan paid off.
Hard Money Loan Specifics
Due to hard money loans generally not being made to those seeking to purchase a home in which they will live, there are certain specifics associated with these loans. For starters, they are of very short duration, often only 12 months. In addition, rather than make equal payments each month, investors only make interest-only payments. This differs greatly from traditional loans, in that hard money loans are granted based on the value of one’s collateral, which is the property to be purchased, instead of the person’s ability to repay. However, when the time does come to pay off the loan, it is done so with a balloon payment at the end, which covers the entire principal, interest, and fees.
Not Your Traditional Bank Loan
Needless to say, hard money loans are not like traditional bank loans. Unlike bank loans, these loans come with very short repayment periods and higher interest rates. However, they also often provide money to individuals who have had credit issues, bankruptcies, or other financial difficulties that would disqualify them from getting a bank loan.
Increased Investment Opportunities
Since applying for bank loans can take weeks or even months, hard money loans offer serious real estate investors a chance to have large amounts of cash available to them very quickly. Because of this, it becomes much easier for them to purchase a prime piece of property, rather than having to sit by and watch another investor get a great deal.
While hard money loans work very well for many investors, there are some possible pitfalls to consider. For example, since they come with much shorter payback periods than traditional loans, an investor will need to sell the investment property within that time frame, or perhaps choose to refinance the property with a traditional mortgage. Along with this, a number of fees are also part of hard money loans, such as origination fees, underwriting fees, and penalties for early payment.
How to Secure a Hard Money Loan
When the time comes to find a lender for a hard money loan, don’t bother visiting your local bank. Instead, ask other real estate investors in your area for guidance. In most cases, hard money loans are given out by private institutions and even individuals, so chances are other investors in your network will know several hard money loan sources nearby.
Offering a less-stringent application process, the ability to get cash fast, and greater flexibility in how the loans can be used, hard money loans are a smart choice for many entrepreneurs and investors. Thus, if you are wanting to purchase a property to start a business or fix-and-flip for a quick profit, a hard money loan may be just the ticket you’ve been searching for all along.