A hard money loan is a secured loan backed by a property, which serves as collateral. The asset-based loan provides funds to real estate investors. Hard money loans are usually provided through investors and specialty lenders. Borrowers typically have a difficult time finding hard money lending services with traditional banking institutions.
Who Uses Hard Money Lenders?
Hard money lenders don’t lend to traditional homeowners. These asset based loans are typically designed for investors who specialize in real property. They are typically provided to investors who have a portfolio of property investments or are in the real estate investment industry. These investors typically have a track record of success in other real estate projects and are good at increasing the value of the property. Developers and house flippers pursue these types of loans.
How Does Hard Money Work?
Hard money lending requires an application. The lender reviews the file and compares it against the underwriting guidelines. They will be approved if they meet those underwriting guidelines. They gauge the potential of the property and determine what the value would be if the repairs were successfully performed. The project and the investor’s track record are looked at more closely than the applicant’s credit score. The funds are provided immediately following approval. The entire process is much faster than the process used by conventional lenders. Loans can close in as little as 24 hours giving the investor an edge to jump on time sensitive opportunities.
What Are The Terms For A Hard Money Loan?
The terms of the hard money loan are different from traditional loans. They are designed to be short-term loans. Their repayment period is typically between six months and five years. Most loans are expected to be repaid within a year. These loans carry higher interest rates than conventional loans. The rates are usually between 10-16% and fees vary from lender to lender and the marker that they are lending in.
The Difference Between Hard Money Loans & Conventional Loans
Hard money loans are secured by collateral. The loans are mainly for investors, so non-investors will have a harder time qualifying for this type of loan. These loans typically have much higher interest rates than other types of conventional loans available. These loans are targeted for properties that are in poor condition, so lenders are comfortable with taken these types of risks. If a default interest rate need arises, your interest rate can increase to 29 percent in some cases. If the loan falls in arrears, the borrower only has a short time to bring the loan current. The foreclosure process moves much quicker with these hard money lenders. The lender forfeits any part of the loan that has already been repaid if a foreclosure action is taken.
What Are The Advantages Of Taking Out This Kind Of Loan?
Convenience is one of the main advantages to getting this type of loan. The application process for a conventional loan can be quite involved and lengthy. A person can get approved for a loan quickly in just a matter of days and in some cases hours. The applicant’s credit isn’t nearly as important as the person’s track record. Flawed or imperfect credit won’t jeopardize a person’s chances of getting a loan. Since borrowers are working with private lenders, they enjoy more flexibility in terms of negotiating. You can renegotiate your repayment schedule or have your origination fees reduced. The loan is secured by collateral. This means that it will be difficult to get the loan using other personal assets, but this may be good for investors who want to protect their assets from lenders.
A hard money loan is specifically for real estate investors who specialize in home rehabilitation and house flipping. Real estate investors have access to quick funding without the red tape that comes with working through a traditional lender. Investors can expand their investment portfolios in taking advantage of these opportunities.