Real estate financing often uses industry jargon and terminology that some applicants are not familiar with. Regardless of the type of real estate loan that you are interested in applying for, you understandably need to understand all loan terms, conditions and more related to your loan. Residential and commercial properties may be among your most expensive assets, and this means that real estate loans likely are among your most substantial debts. You must understand what the terms of your real estate loans are so that you can make informed decisions about using and managing this debt properly.
One of the more common industry phrases that you may come across when applying for any type of loan is a loan term. This phrase actually has two primary meanings, and a closer look at these meanings will help you to manage your real estate financing in the months and years to come.
What Is a Loan Term?
Generally speaking, loan terms describe all parameters for a loan. This broad term may include the loan amount, interest rate, specific term length, amortization, prepayment penalties and more. On a more specific level, the term of a loan describes how long the lender will extend the loan to you. For example, a common term length for conventional residential loan is 30 years. This means that the lender is giving you 30 years to repay the balance. With this and most types of real estate loans, monthly loan payments are expected to be made over the full length of the loan term.
What Are Common Hard Money Loan Terms?
Now that you know more about what a loan term is, you may be wondering what kind of loan term you should expect when applying for a hard money loan. Be aware that hard money loans are short-term real estate loans. All aspects of general loan terms for a hard money loan are determined by the lender based on a review of the specific merits of the loan request. Generally, you can expect a typical hard money loan to extend for approximately 12 months. However, there is considerable fluctuation in this from lender to lender and from loan to loan. In addition, many lenders offer the ability for the loan to be extended with minimal effort required. Some extensions can last up to three to five years.
Most residential loans that you are familiar with are fully-amortizing. This means that the entire loan balance will be repaid in full over the term length. At the end of the loan term, there is not a balloon payment or any remaining balance owed. Hard money loans are usually different. After all, it is not reasonable to expect a borrower to repay the full loan balance within a 12-month period. Many hard money loans are interest-only. This means that no principal is repaid. Some hard money lenders have a large balloon payment due at the end of the loan term.
Because of this common aspect of hard money loans, borrowers need to have an exit strategy to deal with the end of the loan term. In addition to the possibility of extending the hard money loan, the other options are to refinance into a permanent loan or to sell the property. Being aware of the loan term and the loan due date is essential in order to avoid unnecessary issues with your hard money loan.
How Do You Determine the Exact Loan Term?
With a typical hard money loan term spanning from 12 months to several years in length, you understandably may need more specific information before you decide to move forward with a full loan request and application. Hard money lenders typically do not issue firm loan terms until they have reviewed a detailed loan proposal. This loan proposal may include costs to develop or rehab the property, a timeline for the completion of the work and more. Hard money lenders know that you likely cannot obtain permanent financing in the middle of a major rehab project, and they typically will customize the loan term around the specific details of your scenario.
It is understandable that you would not want to devote a substantial amount of time and energy preparing a loan submission if a lender cannot give you the loan term length that you desire. However, you can see that it is not possible for this type of lender to give you specific details about the term length or any other loan parameters without learning more about the scenario. If you are interested in obtaining specific terms for your potential hard money loan, spend time preparing a detailed package that can be submitted to a few lenders. When you take this important step, you can easily shop your loan request around to locate the best terms available for your needs.