A hard money loan is a short-term loan secured by real estate instead of a traditional “soft” mortgage. They are common in the real estate market because many buyers do not qualify for a mortgage from a bank or need to close quickly on a property that doesn’t have time for the bank approval process to take place. Hard money lenders can provide a faster and less expensive way to qualify for a loan. However, since they are a type of unsecured loan, the borrower does not need to have a job or provide a down payment.
Hard money loans are usually taken out by first-time home buyers, investors, and those in a hurry to close. The most common type of hard money loan is a “conventional” hard money loan. A conventional hard money loan is similar to a traditional mortgage, except that the money is lent against the real estate instead of against the borrower’s personal property. Homeowners who get a hard loan are said to “rent” their home while paying off the loan. Most conventional borrowers will pay back the loan within 5 to 6 years or flip the property. Hard loans work for many people but have several risks and are not for everyone.
Property And Money In Hard Money Loans
Generally speaking, hard money lenders expect borrowers to have a good credit history and a proven track record of paying their bills on time. The difference between a hard money loan and a regular mortgage loan is that the lender is willing to take on greater risk. The lender is not usually responsible for the property sold before the loan is fully repaid. Hard money lenders usually require a larger down payment and a longer loan term.
The borrower and hard money lender negotiate the loan terms before signing the paperwork. The borrower typically pays a higher interest rate than a regular mortgage loan and is responsible for the loan payments. For example, a loan officer might charge a borrower 3.75% interest, then negotiate the loan for a 15-year term and a $25,000 loan amount. The borrower and lender can agree to close the loan in 10 years or at any time within the 15-year loan term, subject to the borrower’s payment history.
Hard money loans are usually not for those who need to close quickly. It is usually for those with a good track record who need a larger loan or move forward quickly with a large purchase.
Purpose Of A Hard Money Loan
Hard money loans are often considered a last resort to secure financing for a property. To obtain this type of loan, the borrower must have an excellent credit history and enough cash on hand to repay the loan. The loan amount depends on the property’s equity and is usually not greater than 70% of the appraised value. Hard money lenders will require a cash down payment, an offer letter, and proof that the borrower has the means to make the down payment and the monthly payments on the loan.
A hard money lender will attempt to find the best loan possible for the borrower. The loan may be more expensive than other types of lending, but the borrower has various options to choose from. Hard money loans are usually not for those who need to close quickly.
Hard money lenders are usually not involved in repairs or renovations, such as kitchen and plumbing upgrades. While they may be willing to provide a small hard money loan for a project unrelated to the property, most hard money lenders will not provide larger loans for renovation projects that are not compatible with their investment. The loan is usually secured by a mortgage on the property but may be secured by a lien against the borrower’s personal property. This type of loan is not uncommon in the construction industry.
How Do Hard Money Loans Work?
Applying for a hard money loan is quite different from securing traditional financing. Prospective borrowers must have a deal in place with a developer, property owner, or homebuyer to use their property as collateral. The approval process is much simpler, and most lenders will be willing to lend up to 60-70% of the property’s purchase price or appraised value. The borrower and the lender meet and negotiate the loan terms. The borrower can either pay the entire asking price, or a portion of the price, as a down payment. The down payment amount is negotiated to ensure that the lender will not lose money. Lender’s fees, calculated into the loan amount, can be significant and must be negotiated with the borrower.
The process to get a hard money loan is not that difficult, and usually, it can be completed in less than one hour. A down payment, or equity, must be provided. This shows the lender that you are serious about getting the loan and can provide assurance that you will pay it back. There are typically no credit requirements if the borrower has the equity and can pay back the loan.
How They Are Structured From The Borrower’s Perspective
Hard money loans offer a viable solution for borrowers who can’t get a loan from a traditional lender. They are structured to provide the borrower with what they need to grow their business, purchase a home, or invest in other ventures. The interest rates on hard money loans can be relatively high, and repayment terms may include a balloon payment. Still, these factors make these loans attractive for borrowers who don’t qualify for institutional financing.
How Are They Structured From The Lender’s Perspective?
Hard money loans can be structured in many ways. Still, typically they are structured as follows: Loans are unsecured personal loans where the borrower pays interest only until the property sale closes when the loan balance becomes due. Once the property is sold, the borrower is responsible for repaying the loan in full. They are typically paid back in three to six months; however, the property may be foreclosed upon if a default occurs.
Hard money loans provide an alternative for borrowers who don’t qualify for traditional mortgages. These loans are attractive because the interest rates are typically lower than what a borrower would pay from a bank or credit union. In addition, hard money lenders offer quick approvals and short loan terms, making them a valuable resource for buyers with urgent needs. They also can be used to buy properties at elevated prices due to their lending structure. Buyers looking to purchase property using hard money loans should ensure the lender is reputable, has an excellent track record, and offers multiple financing options. They should be sure to understand all terms and conditions of the loan before signing the contract.
Hard money loans are a fast and easy way for buyers to purchase property when they do not have the down payment or the credit score necessary to obtain a traditional loan from a bank. Hard money loans differ from traditional loans because the property is the collateral for the loan. The borrower is responsible for paying back 100% of the loan, plus interest and fees, regardless of their creditworthiness.