Many real estate investors hear terms that they don’t understand in the beginning, here is one such term- ‘Hard Money Loan’. What does everybody mean by ‘hard money’?
Hard money lenders are individuals or small groups, who lend (hard) money based on property you are buying and not on your credit score. If you cannot manage to boost your credit score before applying for home loan, then these hard money lenders come to your rescue. However, these loans cost (percentage-wise) much more than your regular mortgage, plus high organization fees. A hard money loan might be an appropriate option if you don’t have a high credit score to secure a loan from the bank.
A hard money loan is simply a short term loan secured by real estate. The loan requires monthly payments of interest and small principal amount, with a balloon payment at the end of the term. The amount of hard money loan that is lent is based on the evaluation of the value of the subject’s property. If the bank say’s “no” the hard money lender may still say “yes”.
Property types for hard money loan
A borrower can get a loan on almost any type of property including single family residential, multi-family residential, commercial, land and industrial. Some hard money lenders may do only one type of property loan, namely residential, others may specialize in land or commercial.
What type of deals are hard money loans used for?
These loans are appropriate when bank loans are not possible, or you need the loan within a short stipulated period. They are ideal for-
Fix and Flips
When buyer has credit issues
When a real estate investor needs to act quickly
Who should use hard money loans?
Real estate investors require using this as they may need immediate funding. The ability to get quick funding is an advantage over waiting for the bank procedure. Another reason for opting for this loan is being rejected by a bank for conventional loans.
Interest Rates and points for hard money loans
Higher rate of interest and points are charged by hard money lenders, this may vary from region to region. The hard money lenders are at a greater risk while lending and hence to protect themselves and the funds they invest only in lucrative deals where they will not incur any losses.
Hard money loan to value ratio
The loan amount that a lender will give is determined by the ratio of loan amount divided by the value of the property. This works out on the higher side, but the lenders risk factor is involved.
Who should borrow from a hard money lender?
People with low credit scores or investors who are looking at a quick deal, whatever the reason one should systematically analyze the repayment mode and also consider the advantage of such a property. A hard money loan may look scary but if you need to finalize a deal fast or if no bank is ready to lend then you should go for this loan.
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