Overview of Hard Money Loans
Hard money loans are a form of financing that many people choose as traditional lenders become more hesitant to lend money. They can be a great way to finance a project quickly and with less hassle. But, like all forms of lending, there are some important things you should know before applying for hard cash loans.
Before we dive deeper into this topic, do you actually know what a hard money loan is?
Hard money loans are a type of short-term financing typically used by real estate investors. They are less regulated than traditional loans, have higher interest rates, and may be funded by private individuals or companies rather than banks.
Hard money loans are often used for investments in fix-and-flip properties, as the loan can be approved quickly and the investor does not need to worry about qualifying for a traditional mortgage. However, hard money loans are more expensive than traditional loans and carry a higher risk of default, so they should only be used as a short-term solution.
Here, we will further explore the basics of how does a hard money loan work and how to qualify for one.
What Is a Hard Money Loan Exactly?
A hard money loan is a loan that is secured by real estate. They are typically short-term meaning they have terms of up to three years. And as for where to get a hard money loan, they are usually made by private investors or companies, rather than banks.
Hard money loan borrowers typically use this financing for investment or rental properties. But may also use it to finance the purchase of a property before securing traditional financing.
Hard money loans are more expensive than traditional mortgages, with interest rates of 7% to 12%. And origination fees that will be charged. They are also considered riskier as they are not backed by any government entity.
What Is the Method for Getting Hard Money Loans?
There are a few different ways to get hard money loans. The most common way is to work with a hard money lender. Hard money lenders by definition are private individuals or companies that lend money for the purpose of funding investment properties.
Another way to get hard money loans is to work with a mortgage broker. Mortgage brokers have access to a variety of lenders and can help you find the best loan for your needs.
The last way to get this type of loan is to go through a direct lender. Direct lenders are companies that offer loans directly to borrowers. There are a few advantages to working with direct lenders, including getting lower interest rates and having more control over the terms of your loan.
The Benefits and Drawbacks of Hard Money Loans
Hard money loans are one type of financing you can use to fund your real estate investment projects. They are secured by the property itself, rather than your personal creditworthiness.
And the main benefit is that they are much easier to qualify for than traditional bank loans. Because the loan is secured by the property, the lender is more willing to overlook poor credit or a lack of income documentation. This makes hard money loans an ideal option for investors who may not qualify for traditional financing.
On the other hand, the main drawback of hard money loans is that they typically come with high-interest rates and fees. This is because private lenders are taking on more risk by lending to borrowers with less-than-perfect credit. As such, these loans should only be used as a short-term solution due to their high costs.
Benefits
- Much easier to qualify for than bank loans. This is because hard money lenders focus more on the value of the property being used as collateral than on the borrower’s credit history.
- These loans can be used for a wide variety of purposes, including financing investment properties, flipping houses, and funding business ventures.
- They are funded much faster than bank loans.
- There is no lengthy approval process.
Drawbacks
- They have much higher interest rates than traditional bank loans.
- They are shorter-term loans, which means that borrowers will need to pay back the loan quite fast. This can be difficult for those who are not prepared for the extra monthly payments.
- You will need to put up collateral in the form of the property you are buying. So, if you default on the loan, the lender could foreclose on the collateral.
Is it a Good Idea to Get a Hard Money Loan?
Hard money loans can be a great way to finance a real estate investment. They are easy to qualify for and you can get needed funding in just a few days.
They can also be a great idea if you don’t want to commit to other long-term financing options. Hard money loans are available from 12 months to three years. However, if you need a longer repayment period, you will need to find another source once your loan term is up.
So, is it a good idea to get a hard money loan? That depends on your individual circumstances. If you are confident that you can make a profit on your investment property and you are comfortable with the risks involved, then a hard money loan may be the right choice for you. However, if you are not sure that you can repay the loan or if you don’t want to risk losing your collateral, then it may be best to steer clear of this type of financing.
Hard Money Loan Alternatives
Before deciding if a hard money loan is the best option, you must take a look at alternatives as well. Here are a few options to keep in mind.
You can use this loan for ground-up construction of a new home or commercial building and it includes the purchase of the underlying real estate. These loans may be a little more difficult to qualify for but may also give you a larger amount of money.
Traditional loans
Conventional mortgage financing, including loans you can get from your local bank, has a stringent approval process that focuses heavily on a borrower’s credit score, pay stubs, and cash reserves. But if you can qualify you will score a much better deal on the interest rate. And you will get a longer repayment period to work with.
Bridge loans are a subset of hard money loans. The key difference is that bridge loans do not include the renovation or construction component. They are a great option if you need an even shorter-term loan to hold briefly before selling the old property after you already bought a new one.
Conclusion
Hard money loans can be a great way to finance your real estate investments, but they come with certain risks that you should keep in mind. Like with any other financial commitment of this kind it is important to do your research and understand the terms before committing.
As these loans can be quite pricey, be sure to compare rates from different lenders, understand all fees associated with the loan, and have an exit strategy if things don’t go according to plan. With some research and diligence, these types of loans can help you reach your goals quickly.
