Different Types of Hard Money Loans
Hard money lenders are comprised of private companies and individuals who offer and approve loans based on each individual case. Hard money loans are primarily for real estate for investment purposes. However, there is an exception allowed by some hard money lenders. There are different kinds of hard money loans, such as the bridge loan, fix-and-flip loan, owner-occupied loan and construction loan. Each loan type serves a different purpose. Let’s dive deeper into some of the different hard money loan options.
Bridge loans allow you to purchase a property fast when you intend to refinance or resell it. You can also use this loan to purchase a new property before you get the cash down payment from a property you currently own. Then there’s the fix-and-flip loan, which enables you to buy a fixer upper so that you can sell it, then pay the loan off. The owner-occupied loan, which is less common, is for consumers who can’t get approved for more traditional financing. The construction loan type is for new construction projects and the goal is to refinance and sell the property.
The reason hard money lenders are less interested in consumer loans is because they require compliance with more regulations, such as the Dodd–Frank Wall Street Reform and Consumer Protection Act, which governs the debt-to-income ratio. Essentially, the law is intended to verify that a borrower is able to repay the loan. There are also licensing requirements through the National Multistate Licensing System & Registry for consumer loans.
How Hard Money Loans Work
The loan period for hard money loans is usually about 12 months, but can vary. The monthly payments for hard money loans are interest only, instead of principal and interest. Sometimes there are no payments required. Hard money lenders often require cash that’s according to the Loan-To-Value (LTV) or After-Repair-Value (ARV) ratio. When it’s time to pay the loan off, that occurs in a balloon payment that includes the principal, interest and all fees.
As you can see, hard money loans are unlike most traditional bank loans. While these loans might have a similar underwriting process, they differ in just about every other way. Traditional lenders focus on your credit rating and income, while hard money lenders are more likely to forgive poor credit and are less concerned about your income. Hard money lenders are also more likely to overlook bankruptcies and foreclosures, which is certainly not the case for traditional lenders.
Advantages and Disadvantages of Hard Money Loans
Regardless of which lending product you choose, it’s important to understand any issues surrounding the loan product. Hard money loans have high interest rates and fees. They are also short term and you might have a hard time refinancing because of traditional lending requirements. Additionally, there isn’t a lot of government oversight for hard money loans. These are all issues that should be considered.
When it comes to the advantages of hard money loans, there are several. For starters, the funding process is fast and the terms are flexible. As aforementioned, these loans also have lenient requirements, which means you are more likely to qualify for a hard money loan than a traditional mortgage loan. When you have a real estate investment opportunity, these advantages might be enough to satisfy any concerns that you have.