About Hard Money Loans
For starters, a hard money loan is specifically for real estate, and the amount of the loan is based on the value of your property instead of your ability to pay the loan back. Hard money lenders are typically organizations and private individuals who lend money for different reasons. They make decisions to fund the loans on a case-by-case basis and there are several different kinds of hard money loans. Some of the most common options are fix-and flip loans, construction loans and bridge loans.
A fix-and-flip loan is for investors who want to buy, fix up and resell a property. A construction loan is for real estate developers of new construction projects who plan to refinance and sell the property right away. Bridge loans let you buy, resell or refinance a property. A bridge loan can also let you buy a new property right away and then get cash for a down payment from selling another property that you own. There’s also the owner-occupied loan, which is less common and used for people who don’t qualify for other kinds of financing.
A Deeper Look at Hard Money Loans
Not everyone will be approved for a hard money loan since lenders fund these loans mainly for investment purposes. There’s a good chance that you will not receive funding for your private home. One of reasons is because lenders who fund consumers must abide by additional regulations, which can complicate the process.
Hard money loans are short-term loans that are often for a few years, with 12 months being a more common timeframe. If you received a hard money loan, you would only be required to make interest payments instead of paying money towards the principal and interest every month. This is one of the reasons why hard money loans are attractive to real estate investors. There’s also the fact that you can get financed quickly and the application process is a lot easier than the process for traditional bank loans.
Another common aspect of hard money loans is that you will be required to bring some of your own money to the table. The amount if often based on the Loan-To-Value (LTV) ratio or After-Repair-Value (ARV) ratio. When it’s time to pay the loan off, you’ll do so in a balloon payment that covers any fees, the principal and the interest.
Hard Money versus Traditional Loans
When you compare hard money loans with traditional loans, you’ll find that the only similarity is that they are used for the purpose of buying property. Otherwise, there’s not much to compare. For instance, hard money loans are funded by individuals and organizations that carry different terms than banks. This includes short repayment periods and high interest rates.
When it comes to the value of hard money loans, one important benefit is that the underwriting is similar to traditional loans, but it’s still a lot easier to get approved. Essentially, the benefits of hard money loans include the ability to get the money that you need quickly with flexible terms. This means you’ll have the resources for more investment opportunities. While some of the disadvantages include higher interest rates, fees and a short repayment schedule, many investors find that the pros outweigh the cons.