What is a Hard Money Loan?
A hard money loan is a loan that is typically acquired for the purpose of real estate investing. The borrower obtains the monies to purchase, renovate or develop real estate. This type of financing can also be used for other purposes like purchase of raw land, construction projects, acquisitions and any other reason where short term funding may be needed.
The hard money lenders are different from traditional lenders because they do not have formal banking regulations to go by so they are able to offer more creative lending options in order to provide the capital required for these types of project. When it comes time to repay their loans these types of lenders want their money back fast so they may give out loans with shorter repayment periods in order to get their cash in a timely manner. They will also request a higher interest rate due to the high risk of defaulting on a loan.
How Do Hard Money Loans Work?
The process of hard money loans is a little different from traditional mortgages. In this case, the hard money lender does not get a claim on the borrower’s home for the duration of the loan. Instead, they get a claim on all other assets in case of default.
A hard money lender might ask for personal guarantees and/or collateral in addition to what is offered in terms of collateral by the borrower. The personal guarantee ensures that if the borrower defaults, then they will be liable for paying off any outstanding debt. This is not always required and so it’s important to read each contract carefully before signing it.
Pros of a Hard Money Loan
A hard money loan is a type of loan that is granted based on the equity of the property, not on your credit score or your ability to repay. The borrower has no equity in the home and doesn’t need to make monthly payments. A hard money loan can be used for various purposes such as renovating an older home, purchasing a fixer-upper or starting a business.
The benefit of hard money loans is that there’s no pre-payment penalties and you’re not required to make monthly payments. The downside is that you’re borrowing against something you don’t own and the interest rate may be higher than what you would pay on a home equity line of credit or mortgage refinance.
Cons of a Hard Money Loan
Hard money loans carry more of a risk than conventional mortgages because the borrower usually doesn’t make any down payment, and the interest rates on these loans can be high. These types of loans are typically used in cases where borrowers need to buy a property with cash quickly.
There are three main disadvantages to hard money loans: they’re expensive, they have strict rules, and they have lower credit standards.
The biggest risk that someone faces when taking out a hard money loan is that the borrower doesn’t have enough equity in the property. If this happens, they could lose their investment in the home if it’s sold at a loss.
When to Consider Getting A Hard Money Loan
A hard money loan is a type of loan for non-traditional real estate deals. This type of lending is typically done by private investors or companies on terms that are less strict than traditional loans.
The borrower has to provide an asset, such as the property being purchased, in order to receive the funds. Hard money loans are also secured by the personal guarantee of the borrower. They usually come with rates that are higher than other types of loans, including commercial ones.
If you’re looking for a loan to bridge the gap between short-term financing and longer term financing, then you might want to consider a hard money loan. These loans are beneficial because they come with no credit checks, no documentation up front, and they can be used for almost any type of project.