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- What Are Netting Escrows & How Does It Work?: The Best Guide - January 2, 2024
- The Secret About Prescriptive Easement: Top Guide 1 Must Know - December 4, 2023
- About Home Equity Loans In Texas And How Can One Obtain It - November 27, 2023
What is a Hard Money Loan?
A type of loan that is secured by real property is termed a hard money loan. Hard money loans are regarded as loans of “last resort” or short-term bridge loans.
Primarily used in real estate transactions, the hard money loans are not transactions with the banks but with lenders who are individuals or companies.
How to get a Hard Money Loans
There are terms based on the value of the property that is being used as collateral for the hard money loan and not dependent on the creditworthiness of the borrower.
As traditional lenders, like the banks, do not make hard money loans, the private individuals or companies are hard money lenders who are ready to take potential risks in this type of venture.
Property flippers who plan to renovate and resell the real estate that is used as collateral for the financing can be sought for hard money loans.
The collateralized property is sold by them in a year’s time so the money can get rotated.
Depending on the borrower’s intends to pay off the loan, the higher cost of a hard money loan is offset.
These hard money loans are for a period of one to three years.
Hard Money Loan Requirements
The cost of a hard money loan to the borrower is always more than what could be available through banks or government lending programs, because of the higher risk that the lender is taking by offering the financing.
But for some borrowers who are in a hurry for funds, the increased expense is a tradeoff for faster access to funds, also a less stringent approval process, and potential flexibility in the payment plan.
Hard money loans are used in turnaround situations, short-term financing, and when borrowers have substantial equity in their property but bad credit history.
A hard money loan can be used as a way to push off foreclosure because it gets issued quickly.
The Benefits and Costs of a Hard Money Loan
Hard money loans have their own set of pros and cons related to the process of approval, the loan to value (LTV) ratios, and interest rates.
The Advantages of Hard Money Loans
The approval process of a hard money loan is, much quicker than that of a mortgage or other traditional loans that are moved through a bank.
The lenders of hard money loan whom private investors can make decisions faster because they are focused on collateral instead of the applicant’s financial position.
Lenders spend less time spent on combing through a loan application, verifying income, and reviewing financial documents is not there so the lender doesn’t require a lot of time for approval.
The process will be far smoother if the borrower has an existing relationship with the lender.
Because of a greater value and opportunity for reselling the property themselves in case of default the hard loan investors aren’t too concerned with receiving repayment.
The Disadvantages of Hard Money Loans
Because the property itself is used as the only protection against default, hard money loans usually have lower LTV ratios compared to traditional loans.
The interest rates of hard money loans are usually higher. Compared to subprime loans the rates are higher for hard money loans.
In 2020, the average interest rate for a hard money loan was 11.25%. Last year the rates varied between 7.5% to 15% in the whole of the country.
Because of regulatory oversight and compliance rules, there is a possibility of hard loan lenders not provide financing for an owner-occupied residence.
Conclusion
Primarily used for real estate transactions hard money loans are money from an individual or company and not from a bank.
A hard money loan is taken out for a short time, When a borrower wants to raise money quickly it attracts higher costs and lowers the LTV ratio.
The hard money loans rely on collateral instead of your financial position, the funding is done quickly.
A lender and the borrower can often negotiate the terms of hard money loans. If a borrower defaults the lender still is in a profitable position.
I never knew that a hard money loan helps you fund your big house purchase! My friend has decided that she wants to settle down with her long-time girlfriend after the pandemic. I hope this can convince her to find a financial institution that can help with this!
It was really informative when you explained that hard money loans are primarily used in real estate transactions. I would imagine that it would be important to get the right loan if you are going to be starting a farm. It could be a good idea to consult with different lenders to make sure that you pick the right loan.
The best part of your blog for me is when you said that you could expect hard money loans to be approved quicker since the decision is based on the collateral and not on the financial position of an applicant. I will share this with my sister who has been wanting to have her house in the south remodeled next month so she could sell it at a good rate before the last quarter of the year ends. I will ask him to consider finding a hard money lender that has a good track record of quality services for her peace of mind.
Thanks for such an informative article, Amanda. I totally agree that the approval process of a hard money loan is much quicker than that of a mortgage or other traditional loans that are moved through a bank. Let aside the higher fees as we eventually end up earning more profit than the interest amount we pay. Totally worth it.
My favorite part of your blog is when you said that you could expect a quicker approval process when you apply for a hard money loan. This is a good tip for my brother who wanted to purchase a property through real estate financing before this year ends. He wanted the ensure that the loan process is going to be smooth and fast so he can have everything settled before 2023, so your tips are helpful.
The hours that brokers keep are typically more flexible. Occasionally, your broker may also be willing to work after hours or on weekends and meet at a time and place that works best for you.