About Hard Money Loans
Whether you need a bridge loan, a fix-and-flip loan or a construction loan, there’s probably a hard money lender that can accommodate your needs. Hard money lenders are private companies and individuals who approve loans on an individual basis using criteria that’s less rigid. While traditional mortgage lenders look at credit and income as they determine your ability to repay the loan, hard money lenders are mainly focused on the value of your collateral.
If you want to buy a property now and either resell or refinance it, you can get a bridge loan. You can also use a bridge loan if you want to buy a property and get the cash down payment by selling a property that you already own. Fix-and-flip loans are for buying, fixing and reselling a property, then paying off the loan. A construction loan is for real estate developers to start a new construction project, then refinance or sell it quickly.
There is another loan option that’s far less common; the owner-occupied loan. This loan is for individuals who are unable to secure a traditional mortgage for a property where they intend to live. While there are some hard money lenders who provide loans for owner-occupied consumer loans, many do not because they can be a regulatory nightmare.
How Hard Money Loans Work
A benefit of hard money loans is that the application process is fast and loans can often be funded in less than a week. Borrowers will typically need to provide a cash down payment that’s based on the property’s Loan-To-Value (LTV) ratio or the After-Repair-Value (ARV) ratio. The term for hard money loans is 12 months to several years. You don’t want a lengthy term because of the high interest rates.
Depending on the loan type, you may only need to make monthly interest payments instead of monthly principal and interest payments. Every lender has different criteria. There are some loans that don’t require any payments until the maturity date, at which point you will make a balloon payment. This includes paying the principal, all of the remaining interest and any fees.
Is a Hard Money Loan Right for You?
Hard money loans have a short term, high interest rates and a lot of fees. Additionally, there is little government oversight, so you have to be careful about the lender that you select. When the loan matures, there could be a problem with refinancing because of the “seasoning” period of traditional mortgage lenders.
There are a few questions that you should ask yourself when considering a hard money loan. For starters, is there a less expensive loan option? If so, then your problem is solved. You also want to know if you are in a buyer’s market because this can make selling your property difficult.
Many real estate investors decide that the quick money, relaxed requirements and flexible terms are advantageous enough to move forward with a hard money loan. Sometimes it’s just a matter of using a hard money loan as a tool when an investment opportunity arises. Every situation is different, and by weighing the pros and cons, you can decide what’s best for you from a strategic standpoint.