About Hard Money Loans
Imagine a lender considering more than just your ability to repay a loan when assessing the strength of your application. That’s actually how it works with hard money loans. Hard money lenders provide real estate loans that are made according to the value of your collateral, which is your property. As private investors, hard money lenders have the autonomy to make decisions based on each unique application. They aren’t necessarily required to follow strict guidelines and standards. This method is possible since collateral is involved.
Not all investors need money for the same purpose, so there are different types of hard money loans. For instance, fix-and-flip loans let you buy, fix and flip a property, then pay off the loan. Construction loans are for new construction projects where the real estate developer intends to either refinance or sell as soon as possible Bridge loans can serve different purposes. You can buy a property fast, then resell or refinance it. You can also buy a property before getting a cash down payment from selling a property that you already own.
Aside from the above referenced hard money loan, there’s also the owner-occupied loan that’s less common. In fact, about 90 percent of hard money investors do not offer owner-occupied loans because they are a consumer loan that requires adherence to many regulations, which complicates the lending process. Among other regulations, they would have to satisfy Dodd-Frank requirements to ensure the borrower can repay the loan. If you are interested in an owner-occupied consumer loan, there are a handful of hard money lenders that might be able to help you.
A Closer Look at Hard Money Loans
If you ask real estate investors what they appreciate about hard money loans, they will likely mention the fast and easy application process. Hard money lenders have quick financing turnaround times that can be less than a week. Generally speaking, you will be required to put cash down for a hard money loan and the amount down is often based on the Loan-To-Value (LTV) or After-Repair-Value (ARV) ratio. However, each lender has different requirements.
The terms of hard money loans are extremely short. In fact, the loan period is often 12 months, but could be a few years. During the course of the loan, instead of making equal monthly principal and interest payments, there’s a chance that you’ll make interest only payments. Actually, there are some loans that don’t require any payments until the loan matures, at which point you will make a balloon payment. The balloon payment is comprised of the principal, remaining interest and fees.
Is a Hard Money Loan Right for You?
To determine if a hard money loan is a good option, you’ll need to assess the advantages and disadvantages of this mortgage loan product. Hard money loans have short terms, high interest rates and high fees. They also have little government oversight and could possibly be difficult to refinance. On the flip side, hard money loans provide fast money with flexible terms and not a lot of hassle. Many investors find that the advantages far outweigh the disadvantages, which is why they keep hard money loans in their investment toolbox.