Hard money loans are asset-based loans secured by real estate and issued by private investors and companies.
They are also known as short-term loans and have higher interest rates than traditional residential or commercial property loans. Hard money loans are used by borrowers who have been denied a mortgage or loan application and are typically used for 1-3 years.
They are faster than traditional mortgages and can be used to purchase a property quickly or finance projects that last from a few months to several years. The loan amount and property’s value determine the amount of money a hard money lender can lend.
With a loan-to-value ratio of 65-75%. Hard money loans are most commonly used in the United States and Canada and are unregulated by federal or state laws but subject to state’s interest rate restrictions.
Since the mortgage crisis of 2009, hard money mortgage market has seen an expansion due to the strict regulations placed on banks and lenders.
Hard money lending is different from other types of loans in that it does not consider your income or credit history as collateral. Instead, lenders will consider the property’s worth as the deciding factor and emphasize its after-repair value. After renovations have been completed, ARV is the property’s value.
The differences are:
Hard money lenders will not invest in primary residences. Lenders are more likely to be concerned about owner-occupied residential properties because they are subjected to many regulations and rules.
Hard money lenders do not sell Fannie Mae and Freddie Mac loans. Lenders often borrow money from their funds or pool of investors. The loan amount is determined by their property specialty (if any) and the risk they are willing to take.
Hard money loans are not available for the long term. The loans require to be repaid within a short time. Hard money loans typically require repayment in 6–18 months.
Hard money lenders are subject to their lending criteria. Private lenders, for instance, could be your family member, friend, or business associate. Private lenders may not require you to meet specific criteria before lending you money, giving you greater flexibility when negotiating terms. On the other hand, hard money lenders have a set of upfront points, interest rates, and a defined period.
Private investors and companies specialize in hard money loans and are the ones who can lend these type of loans. There are no hard money loans available at your bank. Hard money lenders do not generally have to adhere to the same regulations as traditional conforming loan lenders, allowing them to set their standards for credit scores and debt-to-income ratios that their borrowers should have.
You can find a hard money lender that will approve you for a loan, even if traditional lenders have rejected your application. Hard money lenders consider the property’s value more critical than creditworthiness.
Hard money loans are generally more expensive than loans through banks and government lending programs due to the lender’s greater risk by providing the financing. An increased cost is an option for quick access to capital, less stringent approval processes, and repayment flexibility.
Borrowers with bad credit and substantial equity in their properties may be eligible for hard money loans in times of crisis or short-term financing. A hard money loan is a speedy way to avoid foreclosure.
A hard money loan has one advantage: the approval process is much faster than applying for a traditional mortgage or any other loan through a bank.
Private investors backing the hard money loan can make quicker decisions because they are more focused on the collateral than the applicant’s financial situation.
Lenders are less likely to spend time reviewing documents and verifying income on loan applications. The process will go much more smoothly if the borrower already has a relationship with the lender.
Hard loan investors do not care as much about receiving repayment. They may have a more incredible opportunity and value to resell the property if the borrower defaults.
Hard money loans have lower LTV ratios than regular mortgages, with a property being the only protection against default, which is around 50% to 70% compared to traditional mortgages, which are approximately 80%. However, it can go higher if the borrower has a history of flipping.
High interest rates are also a standard feature. Hard money loans can have rates that are higher than subprime loans. The average interest rate on a hard money loan in 2020 was 11.25%. Rates ranged from 7.5% to 15.5% for the United States in 2020.
Another problem is that lenders of hard loans might not be able to finance an owner-occupied home because of compliance rules and regulatory oversight.
These are the most common reasons people seek hard money loans.
You will need to reach out to institutions that specialize in hard money loans. A quick internet search for hard money lenders will usually reveal multiple lenders in your local area. You can find the names of local real estate agents and investors groups. Talk to numerous lenders to discuss your needs and build a relationship that will allow you to fund projects quickly and efficiently when you need them.
Because hard money loans are less well-regulated, it is a good idea to shop around. It is possible to work out lower rates with different lenders.
For this reason, hard money loans are often considered loans’ last resort. These loans have many benefits, including faster approvals and funding that is quicker. However, borrowers need to be aware of the risks before deciding which loan is best for them.
Hard money loans have more upfront costs and higher interest rates. They also tend to require a higher down payment, usually 30% or more.
If your credit history and financial standing are good enough to get financing for other purposes, you may find a better option that will be cheaper in the end.
CONCLUSION:
For those who are unable to finance through traditional channels, hard money loans may be an option. They come with higher risk and interest rates and carry much risk if the investment does not go as well as you expected. These types of loans should be left to professionals.
You could look for alternative financing if your mortgage application were denied. It’s safer to work on your credit and apply for a mortgage program that allows those with less than stellar credit histories, such as the FHA loan program.
Hard money might be an option if you cannot get traditional financing for your actual property purchase. Hard money is more likely to close than conventional loans because it is based on your collateral.
Hard money lenders are less likely to spend as long as traditional lenders reviewing your application. However, they will still want to ensure that you repay them. They may not spend as long reviewing your bank statements or verifying your income sources.
Once you have established a relationship, you can quickly move forward with additional funding, allowing you to close deals that other lenders cannot. It can be especially useful in hot markets where multiple offers are made.
Traditional loans might be more affordable if you can qualify for other financing options. FHA loans, for example, allow you to borrow even with poor credit. They also have low down payments and can have lower interest rates than hard money loans.
Hard money agreements may be more flexible than traditional loans. Depending on your circumstances, you might be able to modify the repayment schedule or other strict features that a conventional lender won’t negotiate.
Hard money lenders consider collateral as an essential element. It is easier to get approval for an investment property because the property acts as a guarantee.
Also, you might be borrowing money directly from someone willing to work with your needs which is not a global institution with strict policies.
The hard money loan is not perfect. Although it may seem simple, as an asset secures the loan, all parties are protected. However, hard money also has its flaws.
The additional costs that hard money can cause may be its biggest drawback which is a costly way to borrow money. You will be required to pay closing costs and other fees to obtain funding. The interest rates are high. Hard money loans approval is less critical if you have a foreclosure or other adverse credit reports.
Risky projects that are completed in a short time can be dangerous. If things do not go according to how you planned, like a material delay, structural surprises, or a problem during renovations, you could face a cash flow squeeze or even more interest.
The way lenders value your property can drain your resources faster than you think. If your lender required a 30% down payment when you expected one for 20%, it could signify that you are short of capital for labor or materials.
A hard money loan could be the right solution to help you pay for your dream home. Todd Uzzell, our chief financial advisor, can help you know about all your options better. To discuss your options, fill the form provided on our website and book a virtual appointment!