Loan Against Your Home
The lender authorizes a borrower for a hard money loan depending on the value of the property being acquired.
The lender may run a fast credit or financial check, but the process will be far less stringent than with a regular loan. This speeds up the process, allowing borrowers to receive their funds in days rather than weeks or even months.
The disadvantage of this procedure is that the lender assumes much more risk, resulting in a more expensive loan for the borrower. Hard money loans often have high interest rates and require larger-than-average down payments (though this isn’t always the case).
Hard money loans also have relatively short repayment terms – frequently only a few years.
When compared to regular mortgages, which typically have durations of 15 or 30 years, this is a significant difference.
What Is the Purpose of a Hard Money Loan?
Here are some of the most typical reasons why people seek out hard money loans.
House Flipping
Hard money loans can be used by real estate investors who make money by purchasing low-cost properties in need of repair, making value-adding repairs and renovations, and then flipping the homes for a profit.
Professional flippers frequently prefer faster kinds of financing because these ventures are typically completed quite rapidly. Furthermore, because house flippers typically try to sell the home in a short amount of time – usually less than a year – they don’t require a long loan term like you’d get with a standard mortgage.
Buying an Investment Property
Individuals who want to invest in rental property but can not qualify for standard financing may consider obtaining a hard money loan to fund their purchase.
This strategy can be beneficial for those who are unable to obtain a standard loan due to their credit history or who require more money than a traditional lender will allow them to borrow.
Purchasing Commercial Real Estate
Similarly, if a business owner is unable to acquire standard financing, he or she may use a hard money loan to cover the purchase of commercial real estate. Hard money loans can be beneficial for entrepreneurs looking to purchase a one-of-a-kind property that does not qualify for conventional financing or for those who find regular commercial loan restrictions insufficient for their needs.
What To Expect From Hard Money Loan Rates
As previously stated, hard money loans are costly. How much do they cost exactly? Let’s compare the interest rates on these loans to those on other forms of loans.
According to Freddie Mac, the average rate for a standard 30-year fixed-rate mortgage in September 2021 was 3.01 percent. Hard money loans, on the other hand, can have substantially higher interest rates, often ranging from 8 to 15%.
Hard money loans might potentially be more expensive based on the lender’s chosen loan-to-value (LTV) ratio. If a lender will only finance 70 – 80 percent (or less) of the property’s worth, you’ll almost certainly need to bring a substantial down payment to the closing table. If you don’t have the cash on hand, it may be difficult to find a hard money lender who will work with you.
The Benefits and Drawbacks of Hard Money Loans
Pros
As previously said, some of the benefits of using a hard money loan include:
- a quicker approval process
- Approval is based on the property, not the applicant’s credit history.
- More adaptable Cons
- The following are some of the disadvantages of hard money loans:
- Interest rates are extremely high.
- Frequently necessitate hefty down payments
- Shorter terms allow you to repay in less time.
- More risky than usual funding
- It is possible that you may need to have a demonstrated track record of successful property flips.
- In conclusion: Hard money can be more risky.
- Hard money loans can be a beneficial tool for those seeking financing through non-traditional means. They do, however, come with high interest rates and a large degree of risk if your investment is not as profitable as you had intended. In general, these forms of loans should be left to the professionals.
If your mortgage application has been declined, it’s a lot safer idea to check into other choices, such as focusing on rebuilding your credit or applying for a mortgage program that allows those with less-than-perfect credit, such as the FHA loan program.