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What Is Hard Money Loan and How Can It Be Used?
You've probably heard about hard money loans and how they're a popular choice among real estate investors. While these loans may not be for everyone, they are still ideal for specific situations.
Usually considered short-term bridge loans, hard money loans are mostly used for real estate-related transactions. The money lenders aren't banks, as in traditional loans. Instead, they are individuals or companies. Another significant difference between conventional and hard money loans is that the latter don't rely on the borrower's credit but the estate's value instead.
In this article, you will learn what a hard money loan is, who can use it, and how to make the most of it.
What is a Hard Money Loan?
Funded by private investors, hard money loans are simply short-term loans that mostly rely on the real estate property. The loan terms are usually 12 months but can be extended to longer periods up to five years. Usually, hard money lenders require monthly payments of only interest and a large amount at the end of the term. However, sometimes they need some principal along with interest, too.
The amount lenders are willing to lend largely depends on value of the estate the borrower signs as collateral. It may be a property already owned by the borrower, or it may be the estate the borrower is looking to purchase. Whichever the case, the value of the property usually dictates the amount of the loan.
Although a hard money lender may find the borrower's credit of some importance, they will be primarily concerned about the property's value. In many cases, borrowers who get turned down by banks due to a recent short sale or a foreclosure can still turn to hard money lenders and get a loan. All they need is sufficient equity in real estate. Hard money lenders often say "Yes" when the bank says "No."
Who Can Get a Hard Money Loan?
You can get a hard money loan based on almost any property, including residential houses, commercial buildings, land, and industrial properties. However, depending on company policies, there are differences between various hard money lenders and their rules and regulations.
For example, some companies specialize in a specific type of real estates, such as residential buildings, and won't do loans for any other sort. They have no experience in that area, and they choose not to be bothered. Many lenders have a specific niche they stick to and won't accept anything they aren't comfortable doing.
Some money lenders are particular about not accepting residential homes occupied by any residents, including the borrower and his family.
While getting a hard money loan may be easy and quick with valuable real estate in hand, you still need to learn all the details about specific lenders and their regulations before applying.
What Can Money Loans Be Used For?
Although they may be convenient for many people, hard money loans still aren't applicable for every deal. Conventional borrowing through a bank is still the best way to go if you want to purchase a primary residence and have good credit and no foreclosure or short sale issues. However, you must keep in mind the process's length and have time to wait for the closure and receive funds.
On the other hand, hard money is an excellent financing option when you need a loan for a short period, and you need it quickly.
Hard money loans are excellent for the following situations:
When investors need funds quickly
When the borrower has credit issues
Fix and flips
Who Should Use Hard Money Loans?
There are many reasons why real estate investors ask for hard money loans. The most usual cause is the quick turnaround and the lenders' ability to approve the loan and do the funding promptly. In most cases, lenders will approve and fund the loan within a week. Compared to the month-to 45 days it takes for a bank to approve a loan, the entire process is pretty quick, which seems to be its most useful option.
The application process usually takes only a couple of days, and sometimes, a lender can even approve a loan the same day you apply. It’s incomparable to traditional funding, especially for real estate investors. Being able to obtain financing in a short amount of time brings many advantages. It allows investors to set their offer apart from other competitor bids from buyers who mostly offer slow traditional financing. Many real estate investors find quick money loans to be the critical component for their success.
Being rejected by a bank is another critical reason for using a hard money loan instead of a traditional loan. Many people have bad credit, often due to dire circumstances. Credit issues, short sales – these things happen to all of us. Moreover, banks tend to reject individuals due to insufficient income history and often deny anyone who hasn't had a steady income for a certain period. There are many reasons why banks may reject you for a loan, but a professional hard money lender is willing to take the risk and look past those issues. As long as you're able to repay the loan and you have enough equity, you should be able to get a loan.
Interest Rates in Hard Money Loans
Hard money interest rates vary from region to region, but also from lender to lender. For example, California lenders have the lowest rates in the country because there are many of them out there. Where there's increased competition, there's always a price decrease.
Unlike with conventional bank loans, hard money lenders take on a particular risk with their loans. Due to that risk, the interest rates are generally higher than those of conventional loans. Depending on the loan's risk and the specific lender, rates can go anywhere between 10-15% with 2-4% points of the total amount. Moreover, the loan to value ratio may make a significant impact on interest rates and points.
This article does not necessarily reflect the opinions of the editors or management of EconoTimes