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Sometimes people just don’t qualify for traditional mortgage loans, even if they have good credit and stable income. This is often a result of rigid requirements that can seem impossible to satisfy. Hard money loans can serve as an alternative and an immediate solution for the purchase of real estate. The information below provides insights into hard money loans so that you can make a informed decision about whether it can work for you.
About Hard Money Loans
Hard money loans are for the purpose of buying real estate. These loans are made based on the value of your property that serves as collateral, which is different than traditional mortgage loans that have stricter requirements for income and credit scores. The requirements of traditional mortgage loans are focused on your ability to repay the loan. As individual investors and investment firms, hard money lenders look at each application on its own merit and the criteria is often lenient. In fact, they are more forgiving of issues like poor credit, bankruptcies and foreclosures.
There are different types of hard money loans. A bridge loan is a good option if want to buy property, then refinance or resell it. You can also use a bridge loan to buy new property before getting cash for a down payment from the sale of a property that you already own. As the name implies, a fix-and-flip loan is for purchasing a rehab property, fixing it up, then selling it, at which point you’ll pay off the loan. A construction loan allows a real estate developer to start a new construction project, then sell or refinance it.
The owner-occupied loan is for consumers who are unable to qualify for other loans. There are few hard money lenders that offer owner-occupied consumer loans because many do not want the hassle of increased regulations, such as the Dodd–Frank Wall Street Reform and Consumer Protection Act. There are also certain licensing requirements with the National Multistate Licensing System & Registry that apply to consumer loans. If you are interested in an owner-occupied loan, there’s still a chance that you can find a hard money lender that offers consumer loans.
How Hard Money Loans Work
Some real estate investors are fond of hard money loans because the application process is fast, at times less than a week. The application process isn’t complicated like other loan types. Generally, you will need a cash down payment for hard money loans. The amount required will be determined based on the Loan-To-Value (LTV) ratio or After-Repair-Value (ARV) ratio.
A distinct feature of a hard money loan is the term, which can be up to a few years, but is usually just one year. Instead of making monthly principal and interest payments, you may only be required to make interest payments. There’s even a chance that you won’t have to make any payments until the loan matures, at which point you will make a balloon payment. That final payment includes the principal, the remaining interest, and all of the fees that have been added.
How Hard Money Loans Are Different
When compared to traditional bank loans, hard money loans have higher interest rates and more fees.
While they both offer loans for real estate, there aren’t many other commonalities. The repayment period for hard money loans are very short and there is a lack of government oversight. There might also be issues with refinancing the loan due to traditional mortgage loan requirements.
Despite the downsides of hard money loans, sometimes the pros outweigh the cons. Namely, you can get the money that you need within a week, the requirements are lenient and terms are flexible. These benefits make hard money loans a great alternative that allows you to take advantage of real estate investment opportunities that come your way.