What is a Hard Money Loan?
Just like everything else, you need to understand what a hard money loan actually is before making an informed decision on applying for one. There are a few different kinds of hard money loans that are available, but hard money loans are loans that are lent based on the collateral you have to put down for it. Usually, the collateral that is put down for the hard money loan is the property itself.
Lenders might still look at your credit before approving a hard money loan, but repayment is not their main concern. Some of the different kinds of hard money loans include:
- Owner-occupied Loan – This type of hard money loan is designed for individuals that wish to purchase a property for themselves but have run into roadblocks with other types of financing.
- Bridge Loan – This type of hard money loan is generally extended to people are planning on purchasing a property and reselling or refinancing it quickly. This is often used by people are waiting for payment from a sale on their current property.
- Construction Loan – These are generally hard money loans that are extended to real estate developers who are preparing a new construction project.
- Fix-and-flip Loan – This type of hard money loan is used when the individual plans to purchase a rehab property, which means a property they need to fix quickly before reselling it for a profit.
Benefits and Pitfalls of Hard Money Loans
Just like everything in life, hard money loans can be a good thing or a bad thing, depending on individual situations. A few of the benefits of getting a hard money loan include:
- Lenient requirements – Unlike regular mortgages, hard money loans have fewer requirements for people to meet before being approved.
- Flexible terms – Those that provide hard money loans are usually individual firms or private individuals, which means they are can easily create custom loans and terms for your individual situation.
- Quick money – Most loans can take weeks or even months to be approved, but most hard money loans can be approved in a week or less, especially for real estate investors.
With benefits, there are always pitfalls that can counter them. It is what makes the difference between what type of loan you should apply for. A few of the pitfalls that you could encounter with hard money loans are:
- Short terms – Unlike a regular mortgage loan that might extend to 30 years, a hard money loan has a shorter payback period, typically one to two years.
- High-interest rates – Hard money loans come with a higher interest rate, because they considered more of a risk for the lender, due to the time restraints of the loan.
- Higher Fees – Most lenders that provide hard money loans also have an array of extra fees that they charge for approving a hard money loan, like early-payment penalties, origination fees, or underwriting fees.
When to Consider Hard Money Loans and When Not To
Hard money loans are designed for individuals or businesses that deal with real estate as an investment. If you need money fast or have a poor credit score, a hard money loan might be the best option for you. However, if you are in a buyer’s market, hard money loans could cause more issues than necessary. Due to their high interest rates and high fees, generally speaking, it is best to go with another financing option if it is available.