WHAT IS A HARD MONEY LOAN?
Hard money loans, also known as bridge loans, are secured loans that rely on a property’s value for collateral rather than the borrower’s credit history. They are typically short-term loans with repayment periods ranging from a few months up to a year. Hard money loans are usually provided by private lenders or investment groups rather than traditional banks, making them a faster option for funding. More info about legal money lender
HOW HARD MONEY LOANS DIFFER FROM TRADITIONAL MORTGAGES
- Faster Processing: Hard money loans are typically processed much faster than conventional mortgages. Traditional mortgages might take weeks to close, but hard money loans can be arranged in days.
- Shorter Repayment Term: Unlike the 15- or 30-year terms common for mortgages, hard money loans are short-term, often between six to 18 months. This is ideal for investors who need to complete projects quickly and repay the loan.
- Higher Interest Rates: Since hard money loans come with more risk for lenders, they often have higher interest rates compared to conventional loans. Interest rates can be several points higher than traditional mortgages.
- Larger Down Payment: Hard money lenders usually require a higher down payment, typically between 20% to 30% or more, which is more than the 3% down payments seen with some conventional loans.
WHO BENEFITS MOST FROM HARD MONEY LOANS?
Hard money loans work best for certain types of borrowers:
- Property Flippers: These investors benefit from quick cash for purchasing and renovating properties. A hard money loan allows them to act fast when bidding on properties and to complete renovations without waiting for lengthy mortgage approvals.
- Borrowers with Limited Loan Options:** People with lower credit scores or limited proof of income may struggle to get traditional financing. Business owners or those who have had a recent credit-impacting event may find hard money loans a more accessible option.
- Homeowners Facing Foreclosure: Some homeowners who have equity in their homes but are at risk of foreclosure might benefit from a hard money loan to pay off other debts or buy time.
HARD MONEY LOANS’ BENEFITS AND DIFFICULTIES
4.1 PROS
- Flexibility in Loan Terms
- Quick Access to Funds
- Minimal Credit Requirements
4.2 CONS
- High Costs and Interest Rate
- Risk of Short-Term Repayment
- Lower Loan-to-Value Ratios (LTV)
HOW TO OBTAIN A DIFFICULT MONEY LOAN
If you’re interested in a hard money loan, follow these steps:
- Find a Reliable Lender: Real estate agents, title companies, or online searches can help you find reputable lenders.
- Meet Requirements: Each lender has different requirements, but generally, you’ll need a down payment, proof of income, and some financial documentation.
- Apply and Compare: Gather and compare multiple loan offers to see which lender provides the best interest rates and terms. Consider both the interest rate and any associated fees, including application fees and prepayment penalties.
- Plan Repayment: Given the short repayment term, have a solid plan for how you will repay the loan. Many borrowers intend to repay by selling the property or refinancing.