Sometime finding a loan for a real estate transaction is difficult. This is especially true when it comes to bank loans that tend to have rigid requirements. Fortunately, there are other options if you are unable to qualify for a traditional mortgage.
Hard money loans can be a viable solution if you’re experiencing mortgage issues. Below you’ll find useful information regarding hard money loans with insights to help you better understand this product so that you can make an informed decision.
About Hard Money Loans
Hard money loans are for real estate purposes and are unique in a variety of different was. For starters, instead of making lending decisions based on your ability to repay, hard money lenders primarily consider your collateral. They don’t typically follow stringent rules, but assess each case on its on merits. There isn’t just one type of hard money loan, there are several. For instance, there is a bridge loan, fix-and-flip loan, construction loan and owner-occupied loan. Here’s a bit more information about these particular options.
Bridge loan: Enables you to buy a property fast if you intend to refinance or resell it. You can also buy a new property before getting the cash down payment from the sale of a property that you already own.
Fix-and-flip loan: With this kind of loan, you can acquire a rehab property, fix it up as soon as possible, resell it, and then pay off the loan.
Owner-occupied loan: This less common loan type is for consumers who don’t quality for traditional loans and want to purchase property for personal use.
Construction loan: Real estate developers can use this loan for a new construction project if they intend to refinance or sell the property immediately.
The reason why owner-occupied loans are less common is because hard money lenders who offer this product must comply with additional regulations, such as Dodd–Frank and licensing requirements. In fact, it’s estimated that approximately 90% of private lenders in some states do not offer hard money loans for owner-occupied properties.
How Hard Money Loans Work
Perhaps one of the most unique aspects of hard money loans is the extremely short term, which is about 12 months. However, sometimes they are a couple of years. Payments made for most hard money loans are interest only, instead of principal and interest payments. There are even some loans that don’t require any payments at all, which can make this loan attractive to real estate investors from a strategic standpoint.
Hard money loans are also beneficial in that the application process isn’t complicated and usually takes less than a week. Borrowers are often required to have cash and the amount is based on either the Loan-To-Value (LTV) ratio or the After-Repair-Value (ARV) ratio. Hard money loans are paid off with a balloon payment at the end of the term. This final payment covers the entire principal, remaining interest and fees.
Is This The Right Loan For You?
Hard money loans can be attractive because, unlike traditional bank loans, lenders are often willing to accept borrowers with foreclosures, bankruptcies and bad credit. Although hard money loans might have similar underwriting standards as bank loans, they are far less concerned with your income and credit rating. Instead, the focus is on the collateral and LTV ratio.
There are both pros and cons when considering a hard money loan. The cons include high interest rates, high fees, the short payback period, lack of government oversight and possible challenges with refinancing. That’s a lot to think about. On the flip side, the pros include quick access to money, flexible terms and less rigid requirements. This could mean that you’re able to move forward with investment opportunities.