It would be nice if everyone could qualify for an excellent mortgage rate, but unfortunately, that is not the world we live in. There are a lot of reasons why people are denied getting a mortgage. However, hard money loans are an alternative that some people have taken advantage of to get the money they need for their mortgage.
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.
A hard money loan will provide you with fast funds to purchase an investment property. This is an attractive option for those who wish to not apply for conventional mortgage financing or would have difficulty qualifying. These loans come in a variety of different types. This article will address the types of hard money loans we make available to our real estate investors.
Common Hard Money Loans:
A common type of hard money loan is a bridge loan. This loan acts as a type of intermediate loan for those who wish to purchase a property immediately but may not have enough funds for a down payment. The property should be resold or refinanced in order to convert the loan.
Another type of hard money loan is to purchase a residence for the sake of fixing it up and reselling it. This loan provides the buyer with fast funding in order to take advantage of the investment opportunity. The loan is repaid once the house is sold.
Other Hard Money Loans:
Since hard money loans are nontraditional financing, lenders can review requests and decide based on the scenario. This flexibility is appreciated by investors who may not fix the standard financing criteria.
Benefits of Hard Money Loans:
One of the biggest benefits of hard money loans is that they’re able to provide financing for borrowers who don’t meet the standard guidelines. A hard money loan lender is primarily concerned with the value of the home and what the after-repair value will be. This means that borrowers who have poor credit or limited assets may be able to purchase a property quickly. Borrowers don’t have to worry about missing out on opportunities that could lead to high profits.
Requirements for a Hard Money Loan:
The minimum qualification to be approved for a hard money loan is to have a winning property selected. Since the lender will base their decision primarily on the potential of the project to be successful, property selection is a key factor. As with any loan, credit is checked; however, it’s not a major factor when deciding for approval. Income and assets are also reviewed; however, the primary focus remains on the property and its potential.
The borrower should be able to provide a recent appraisal or comparable sales in the area of the home. This allows the lender to determine a realistic resale value. A home inspection done by a professional inspector is also helpful. Home inspections take a closer look at the property to determine the actual condition of the property. This is a prudent measure that can save investors a great deal of money by avoiding pitfalls such as structural damage.
Avoiding the Pitfalls of Investor Lending:
While a hard money loan is a great solution for real estate investors, it may not work in some scenarios. For example, a property that will be occupied by the investor as their primary residence wouldn’t be a good candidate for a hard money loan. These loans are designed as a stepping stone to fix and resell a property. It may be difficult to meet lender requirements if the borrower doesn’t meet the criteria for conventional financing. Projects that last for an extended amount of time may also not be the best candidates for a hard money loan. The interest rates on these loans are higher due to their non-conventional nature.
How to Apply for a Hard Money Loan:
If a hard money loan is suitable for your next project, our loan professionals will be happy to help. We provide fast funding times and courteous service. Our online application process will get you started or you’re welcome to give us a call to apply. Get in touch with us to discuss all your real estate financing options, today!