Hard Money Loans: The Valley Funding Guide To Hard Money Loans
What are hard money loans? These types of loans are short-term loans commonly used by investors.
They are popular with house flippers or developers who renovate properties to sell. They might also be a solution if you are facing foreclosure.
Private lenders or investor groups usually fund hard money loans. They typically use equity or real property as collateral.
How Do Hard Money Loans Work?
These types of loans are secured by the property equity. Lenders don’t look at the borrower’s credit and financial profile. The loan is typically based on the property’s value. It also comes with a short repayment term.
For this reason, real estate investors find these types of loans attractive. Hard money lenders also get repaid within a relatively short time.
Some hard money loans are structured as interest-only loans. However, they contain a large balloon payment. This makes them riskier than other kinds of financing.
Hard Money Loans Vs. Other Mortgages And Loans
How They differ from typical mortgages for several reasons:
- Applying for and closing on a hard money loan is typically faster than a traditional mortgage. However, the repayment terms are much shorter than the 15- or 30-year timelines you’d get with a mortgage.
- Loan interest rates are also usually much higher than those for a traditional mortgage.
- Lenders require a down payment, often one that’s a higher percentage than a traditional mortgage. It’s usually around 20% or 30% or more.
They are also different from so-called soft money loans:
- Hard money loans are usually secured by physical assets like property and their assessed value in the form of equity. These types of loans are generally non-recourse. That means if the borrower doesn’t repay the loan, the outcome is simply forfeiting the pledged asset.
- Soft money loans are backed by the borrower’s credit.
These types of loans also work differently than traditional loan lenders. If you’re thinking about working with a hard money lender, there are a few things to know first:
- Similar to payday lenders: Hard money loans are similar to payday lenders offering personal loans. However, hard money lenders have little oversight or regulation.
- Higher interest rates: Loans like these come with greater risk for the lender. This translates to a higher interest rate for the borrower.
- Shorter loan terms: These types of loans terms typically range from a few months to a few years.
- Different rules: Lenders are free to set their own lending requirements.
Who Benefits From These Types Of Loans?
The types of borrowers who tend to get these types of loans include:
- Property flippers
- Borrowers who don’t qualify for traditional loans
- Homeowners facing foreclosure with substantial equity in their home
Real estate investors who flip properties will often get hard money financing.
“Property flippers like hard money loans because they can get the cash fast. This expediency is beneficial when they’re bidding on a property.
Borrowers Who Don’t Qualify For Traditional Loans
There are many reasons some borrowers don’t qualify for a traditional loan. These reasons might include a recent divorce that affected their credit score or the inability to document their income. For business owners, too, proving income can sometimes be challenging.
Self-employed people who write everything off might be able to afford a mortgage, but their taxes don’t reflect that.
