All You Need To Know About Hard Money Loans
A hard money loan is a type of loan that is secured by real property. Hard money loans are considered loans of “last resort” or short-term bridge loans. These loans are primarily used in real estate transactions, with the lender generally being individuals or companies and not banks.
A hard money loan, usually taken out for a short time, is a way to raise money quickly, but at a higher cost and lower LTV ratio. Because hard money loans are not traditionally executed, the funding time frame is reduced immensely.
Terms of hard money loans can often be negotiated between the lender and the borrower. These loans typically use the property as collateral. Repayment can lead to default and still result in a profitable transaction for the lender.
Most loans require proof that you can repay them. Usually, lenders are interested in your credit scores and your income available to repay a loan. If you have a solid history of borrowing responsibly and the ability to repay loans (as measured by your debt to income ratio), you’ll get approved for a loan.
Getting approved with a traditional lender is a painfully slow process even with great credit scores and plenty of income. If you have negative items in your credit reports (or an income that is difficult to verify to your lender’s satisfaction), the process takes even longer and you might not ever get approved.
Hard money lenders take a different approach:
– They lend based on collateral securing the loan, and they are less concerned about your ability to repay. If anything goes wrong and you can’t repay, hard money lenders plan to get their money back by taking the collateral and selling it. The value of the collateral is more important than your financial position.
Hard money loans are generally short-term loans, lasting from one to 5 years. You wouldn’t want to keep them much longer than that anyway, because interest rates for hard money are generally higher than they are for traditional loans.
Special Considerations for Hard Money Loans
The cost of a hard money loan to the borrower is typically higher compared to financing available through banks or government lending programs, reflecting the higher risk that the lender is taking by offering the financing. However, the increased expense is a tradeoff for faster access to capital, a less stringent approval process, and potential flexibility in the repayment schedule.
Hard money loans may be used:
- in turnaround situations
- in short-term financing (Fix and Flip and Fix and Hold deals)
- by borrowers with poor credit but substantial equity in their property
- by people that want invest en real estate buy he doesn’t have much money
Since it can be issued quickly, a hard money loan can be used as a way to stave off foreclosure.
One such advantage is the approval process for a hard money loan is often much quicker than applying for a mortgage or other traditional loan through a bank. The private investors who back the hard money loan can make decisions faster because they often don’t make credit checks or examine a borrower’s credit history the steps lenders usually take to investigate an applicant’s ability to make loan payments.
These investors aren’t as concerned about receiving repayment because there may be an even greater value and opportunity for them to resell the property themselves if the borrower defaults.
Another advantage is that since hard money lenders don’t use a traditional, standard, underwriting process, but evaluate each loan on a case-by-case basis, applicants can often negotiate adjustments regarding the repayment schedule for the loan. Borrowers can angle for more opportunities to pay back the loan during the window of time available to them.
Why Use Hard Money?
If hard money is expensive, why would you use it? Hard money has its place for certain borrowers who cannot get traditional funding when they need it.
Speed: because the lender is mostly focused on collateral (and less concerned with your financial position), hard money loans can be closed more quickly than traditional loans. Lenders would rather not take possession of your property, but they don’t need to spend as much time going through a loan application with a fine toothed comb – verifying your income, reviewing bank statements, and so on.
Once you have a relationship with a lender, the process can move quickly, giving you the ability to close deals that others can’t close (that’s especially important in hot markets with multiple offers).
Flexibility: hard money agreements can also be more flexible than traditional loan agreements. Lenders don’t use a standardized underwriting process. Instead, they evaluate each deal individually. Depending on your situation, you may be able to tweak things like the repayment schedules.
You might be borrowing from an individual who’s willing to talk – not a large corporation with strict policies.
Approval: the most important factor for hard money lenders is collateral. If you’re buying an investment property, the lender will lend as much as the property is worth. If you need to borrow against a different property you own, that property’s value is what the lender cares about.
If you’ve got a foreclosure or other negative items in your credit report, it’s much less important – some lenders might not even look at your credit (although many lenders will ask about your personal finances).
Most hard money lenders keep loan-to-value ratios (LTV ratios) relatively low. Their maximum LTV ratio might be 50% to 70%, so you’ll need assets to qualify for hard money. With ratios this low, lenders know they can sell your property quickly and have a reasonable shot at getting their money back.
Hard money loans are one of the most used loans by real state investors and individuals with credit problems. If you have any questions about this type of loan, call us: 305-742-81798 … or send us an email Contact@MaraidLending.com … and one of our experts will contact you in less than 48 hours.