A hard money loan is a short-term loan, typically for six months or one year. This type of lending can be used to purchase an asset that will provide income and/or appreciation in the long run. The hard money lender invests his own funds in order to offer you a lower interest rate than your bank would require.
They also have more flexibility with their terms because they are not regulated by the government like banks are.You will need to find out if hard money loans are available where you live before applying for one. If so, this article will give you some tips on how hard money loans work!
What is a hard money loan?
A hard money loan is a type of asset-based financing. It’s not the same as other types of loans such as term or line-of-credit that are backed by an income stream, collateral, or assets. One more thing to know is hard money loans are typically short-term meaning they don’t go past five years.
The hard money loan is also considered ‘piggyback’ financing because it does not require an independent appraisal of the home’s value. Instead, the hard money lender will rely on your own estimate of how much you think your house is worth in its current condition. Additionally, hard money loans are generally not insured by the FHA or VA because they’re considered ‘riskier than other types of mortgages.
The structure of a hard money loan is dependent on how much you want to borrow and what your project will cost overall. For example, some lenders may agree to loan 80% of its value while others might be willing to lend up to 70%. You’ll have a better chance of getting approved for a hard money loan if it’s an investment property rather than someone’s primary residence.
Lastly, hard-money borrowers usually pay higher interest rates because these funds can be characterized as being riskier according to traditional lending standards since there isn’t any collateral involved in the transaction.
How does it work
To get a hard money loan, you’ll have to apply for it with a hard money lender. The application process is the same as when applying for other types of loans but if your credit score isn’t that great or there are outstanding debts on your report, it could push back your chances of getting approved until they’re satisfied with how much debt you owe and whether or not creditors can be repaid in full.
Another factor that determines what type of hard-money loan you will receive is how long you plan on holding onto the property—the longer you intend to hold onto it, the better chance lenders will give out bigger amounts upfront at lower interest rates because they know their investment has more time to mature into equity.
Lenders can also help you by explaining hard money loan options and what your maximum borrowing power will be.
The benefits of a hard money loan
Hard money loans have a lot of benefits, the biggest being that hard money lenders loan on property’s value rather than just on credit. This is where hard-money financing really shines — it provides more opportunity for real estate investors to quickly get into properties they can’t afford out of pocket. With hard money loans, it also costs less in time and fees which means you save lots by not having to wait months or even years to close your deal with these types of fast cash mortgages. Instead, hard lender funds are usually available within one week!
Another benefit worth mentioning is how collateral isn’t required when applying for this type of funding unlike bank loans or other traditional forms such as personal credit cards. It makes getting hard interest easier because there’s a greater chance you’ll be approved.
Lastly, hard money loans are a great way to get financing for short sales and auction properties that can’t qualify for traditional mortgages due to slow foreclosure timelines or other financial setbacks that might have occurred from the sale of an asset since hard money lenders don’t require as much paperwork compared with what’s needed by banks.
Drawbacks to a hard money loan
Hard money loans do have some drawbacks, but they’re usually outweighed by the benefits. The hard-money loan process can be tricky for novice borrowers because it’s hard to negotiate with hard money lenders since their standards are strict and set in stone. If your deal doesn’t meet those requirements, you’ll lose out on an opportunity to get financing altogether.
Another drawback is that hard-money loans come at a high-interest rate which means you will end up paying more than what it might cost for other types of mortgages like FHA or VA funding. On top of that, hard-money lenders charge points as well so every time you borrow $100,000 then expect to pay around $15-$20k upfront before getting started on repairs.
Lastly, hard money loans are known to be fast cash mortgages that come with no strings attached. This means hard money lenders don’t require monthly payments or lengthy loan commitments like banks do which is why hard interest rates tend to be higher in comparison.
Where can you find more information about hard money loans?
There’s a lot of hard-money loan information out there for those who are interested in getting started. If you’re not sure where to start, simply type hard money loans into the search bar and the internet will provide you with all sorts of articles, eBooks, and blog posts detailing what hard interest is as well as strategies on how to get approved quickly so that your real estate project can begin construction soon!
You can also speak directly to hard money lenders about their options by calling them up or visiting their website which usually has FAQs explaining everything from qualifications & requirements down to fees and rates — it’s free too!
You now know what a hard money loan is, how they work, and the benefits. The drawbacks are also important to consider before applying for one. For those who need immediate access to funds, hard money can be the answer. Interest rates and conditions vary from lender to lender so it’s important you do your research before choosing this type of loan for financing.