Hard money loans are often viewed as predatory, though these loans might be essential for individuals engaged in certain types of ventures, such as real estate renovation and house flipping. Our article gives you more information about hard money loans and details on how to get a hard money loan.
What Is a Hard Money Loan?
This is one that provides cash quickly, within a few days, instead of the weeks or months that are associated with traditional loans. Unlike traditional loans that typically come with extensive personal background checks and financial verifications, hard money loans are usually obtained from a person or a private company. They will accept property or other assets as collateral if the loan is defaulted on, and due to the short repayment periods and high interest rates, hard money loans are often considered riskier than traditional loans.
Why Use a Hard Money Loan?
They are typically the best option for individuals who have been denied a traditional loan but still need money. Because of the less stringent checks associated with hard money loans, approval happens quicker, and individuals will receive their money faster. This makes it possible to make purchases such as closing on housing rapidly, instead of waiting months as one would with a traditional loan or mortgage.
The most common uses of hard money loans include:
- House flipping – purchases and renovations happen fairly quickly, and homes are sold within a few years, making it helpful to have a shorter repayment period.
- Investment property purchases – individuals who don’t qualify for traditional loans may utilize hard money loans to complete the purchase of an investment property.
- Commercial property purchases – hard money loans can be utilized to purchase more unique properties that don’t necessarily qualify for traditional loans, or for business owners who don’t qualify for certain types of financing.
Of course, there are a few other reasons why you might want to take out a hard money loan instead of a traditional loan. Make sure to keep your options in mind as you consider these large purchases so you can determine which loan type is best for your needs.
How to Get a Hard Money Loan
They are generally received by the potential lender performing a quick check on the borrowers’ credit or finances and then deciding to approve or deny them. The value of the property or item being purchased with the hard money loan is taken into consideration, as is the asset or property that is being utilized as collateral with the loan.
The lender does take on more risk with a hard money loan, which is something that contributes to the higher interest rates associated with this loan type. Hard money loans may also require larger down payments and they typically have repayment periods that are spread over a few years, instead of the more traditional 15 or 30-year terms that are associated with more traditional loan types.
Contrary to conventional loans, hard money loans are largely asset-based, with approval hinging on the property’s value rather than the borrower’s credit history. However, gaining a comprehensive understanding of the eligibility criteria is paramount. Hard money lenders evaluate certain aspects: the type and state of the property involved, the borrower’s experience within real estate, and the loan-to-value (LTV) ratio.
Each lender may set unique requirements based on these factors. By delving into these specifics, prospective borrowers can accurately gauge their potential for obtaining a hard money loan, enhancing their financial decision-making process.
Things to Consider With Hard Money Loans
Below, we give you a quick look at the pros and cons associated with hard money loans. It’s important to keep both of these items in mind before you make a decision about the loan type you need so that you are properly informed.
The following pros are all valid reasons why a hard money loan might be the best loan type for your situation:
- Hard money loans generally have a faster approval process, and you can receive money within days instead of weeks or months.
- Generally, the hard money loan is approved based on properties and assets, not your credit history.
- They tend to be more flexible, and there is less strict underwriting involved with the loan process.
- They are a great choice for individuals who are flipping houses, or for those who are looking to make quick purchases of investment properties.
These hard money loan cons are important to keep in mind when you consider taking out this type of loan:
- They have high-interest rates, something that makes these loans seem predatory to some.
- You may be required to put down a large down payment when purchasing property with hard money loans.
- They have shorter repayment terms, which might be stressful if you are attempting to sell or flip properties to gather the repayment money.
- You may need to have a record of successful hard money loans for some lenders to consider approving you.
- They tend to be riskier in general than traditional loans or financing options.
Securing the Hard Money Loan You Need
When it comes to hard money loans, you may be tempted by the less stringent approval terms and quicker approval times so you can get your money faster, but it’s important to keep in mind the risks associated with hard money loans. Review the pros and cons of this loan type and evaluate what you will be using the loan for to determine whether or not hard money loans are the best choice for your specific financing situation.
An often-overlooked aspect of hard money loans is the necessity of a robust exit strategy. Given their nature, hard money loans typically feature short repayment terms. Consequently, borrowers must design a repayment plan well in advance, ready to execute once the loan is acquired. This might include selling the property, transitioning to a traditional loan, or tapping into other financial sources. By comprehending the significance of a well-planned exit strategy, borrowers can mitigate potential challenges, promoting a successful and smooth loan repayment experience.