Hard Money Loan Basics
Hard money loans are not as widely available as traditional mortgages. If you want to make a regular home purchase, these loans are really not an option. Most hard money loans are for investment purposes only, and lenders do not provide financing for noninvesting objectives.
The terms are set for repayment over a short period of time. In most cases, the terms range from one to two years. One of the popular features of these loans is quick access to working capital. Instead of waiting weeks or even months to get cash in hand from a traditional loan, hard money loans usually fund in a few business days.
The difference between a hard money loan and a regular mortgage is how you repay the loan. Rather than making equal payments each month, you pay interest on how much of the loan you use during the loan term. Once the loan term ends, the remaining principal balance becomes due.
When to Use Hard Money Loans
If you are a real estate investor and have not made the plunge into hard money financing, here are some common situations where these loans are a good choice:
• Less Than Ideal Credit- It is difficult to qualify for a traditional mortgage if you have shaky credit. It is next to impossible to qualify for investment purposes from a regular lender if your credit is less than average. Your score does not impact qualifying for a hard money loan as much as it does a traditional loan. Hard money lenders place more emphasis on the value of the investment than they do your credit score.
• Need Access to Fast Capital- If you need money for an investment opportunity right away, a hard money loan is a solid choice. Real estate markets move fast, so that good investment you found today could be gone tomorrow. Traditional loans can take weeks to complete, which is not ideal for a rapidly changing housing market.
• Limited Financing Options- It is not easy to finance a real estate investment, especially when mortgage lenders have strict requirements. Hard money loans do not have as many requirements as regular lenders, so you have a better chance of securing the financing you need.
Hard Money Loan FAQs
If you are new to hard money loans, you might have a few questions about the ins and outs of these loans. Here are some frequently asked questions and answers to help take some of the mystery out of these loans.
Are the interest rates higher on hard money loans?
Since there is no guarantee you can pay the loan back with your income alone, lenders often charge above-average interest rates.
What types of investment properties can I buy with a hard money loan?
There is no limit to what property you can buy with these loans. If you can prove your investment is valuable, then hard money lenders will give you the financing you need for virtually any property type.
Can I use a hard money loan to renovate a home?
Many investors use hard money to buy and renovate properties. Some lenders give you a part of the money right away to start repairs based on the after-repair value (ARV) of the property.