A hard money loan is a type of asset-based loan. It’s also known as “lending against real estate.” The lender makes the decision to lend money based on the equity in your home, not your credit score or ability to repay.
This means that you can get access to funds far more quickly than with other types of loans. However, a hard money loan starting at 12% interest can quickly go up to 20+% if defaulted. Be wary of the conditions coming with these loans.
If you’re interested in learning more about this type of financing, this article will cover everything you need to know.
When you’re prepared to take your financial literacy further, keep reading about hard-money loans.
Hard-Money Loan: What Is It?
A hard money loan is asset-based financing that uses real estate as collateral. This means that the property has to be used to guarantee repayment and cover your losses if it goes into foreclosure.
Furthermore, hard-money lenders are more likely to offer short-term loans that one can repay in a few weeks up to three years.
Not to mention, the interest rates for hard money loans are typically higher than those of traditional banks, averaging between 12 and 18 percent.
What do You need To Know About Interest Rates?
The interest rate for this kind of loan varies depending on how much risk you pose, which ultimately affects the cost of borrowing money from investors or lenders.
The higher the chances are—such as high vacancy rates, the high number of late payments, etc.—the more expensive the loan.
However, since these kinds of loans usually carry low credit requirements, they have become popular among borrowers struggling to get traditional mortgages due to bad credit.
What Is the Application Process Like?
Most hard money lenders require you to provide all your financial information, including income and assets statements, as well as detailed lists of expenses like current mortgage rates or utility bills.
Not only that, but they will also need a copy of your last two years’ tax returns to make sure if their investment is safe with you. Thus, proving your ability to repay them on time without any issues.
Additionally, borrowers are required to pay an origination fee which can be up to five percent of the loan amount for this type of financing option—and it’s non-refundable regardless if you choose not to accept it at the end.
Hard money loans do have their pros and cons, but if you’re fully aware of them before signing on the dotted line, it can be a great financing option for your next investment property.
How Do They Work?
The typical hard-money loan is based on the current market value of your property rather than what you owe.
This means that if there’s a significant increase in price after repairs and renovations, it will be reflected when determining how much money to give you. Thus, making sure that potential profits are protected from loss.
Unlike traditional mortgages, which require high credit scores and ample down payments before giving borrowers access to capital, hard-money loans tend to carry low credit requirements (or none at all).
Additionally, they usually only focus on the current state of real estate—which means that past problems like bankruptcy or foreclosure don’t play into the equation. However, they can still get approved by investors or lenders who overlook your poor financial history.
How Do They Differ From Other Financing Options?
With traditional loans, borrowers are required to put down 20 percent of the total purchase price before getting approved for a loan, whereas hard money lenders might not even require you to have any funds at all if it’s your first time investing in real estate.
Moreover, these lenders will only care about how much cash you can provide on top of what they give you—which means that even people with bad credit can get financing options through them.
On the other hand, banks offer long repayment periods, ranging from 15 years up to 30 years, depending on their requirements and, most importantly, your financial situation.
In contrast, hard-money loans usually have a repayment period of only six months to three years, which is very appealing for short-term investments.
The bottom line: if you’re looking for a fast and easy way to get financing for your next investment property without all the hassles that come with traditional mortgages, then a hard money loan might be the right choice for you.
Just make sure that you know what you’re getting into before signing any contracts!
What Are the Benefits of a Hard-Money Loan? Why Would I Want One?
There are a few benefits of getting a hard money loan that you should know before making your decision. Here are some of the key advantages:
Quick Turnaround Time
Since there’s no red tape or bureaucracy involved in the process, you can usually get your money within days (or even hours) after submitting your application.
The Urgency
Since banks are not in business to do anything but make money, it can be difficult for customers who need quick funding. Thus, hard-money loans often provide consumers with the fastest possible loan approvals that they could ever hope for among traditional financial institutions.
No Credit Requirements
Unlike traditional bank loans, which require high credit scores, hard-money lenders don’t care about your past financial history. This makes it easy for people with bad credit to get approved for a loan without having to jump through hoops.
Current Value Rather Than Outstanding Debt
Since these loans are based on the property’s market value and not the amount of money you owe, there’s more potential for profit. Thus allowing investors to make back their investment relatively quickly.
Of course, this is not an exhaustive list of hard money loan benefits. Nevertheless, it’s a decent start for this important financial topic.
What Are Some Downsides? How Can I Protect Myself if Things Don’t Work Out as They Should?
There are some downsides involved with getting this type of financing, which you should know about before signing on the dotted line. Here are some things to consider when taking out a hard money loan:
Higher Interest Rates and Fees
Since these loans typically take about three months to get approved, you’ll be required to pay much more than what traditional banks charge.
This is because lenders will tack on additional points or administrative costs onto your total funding amount—which could add up quickly if you’re not careful.
Brief Repayment Periods
Unlike other types of mortgages which offer long terms ranging from 15 years up to 30 years, it’s typical for hard money lenders to only give borrowers between six months and three years’ worth of leeway before they need their capital back in full. Thus making sure that investors can cash in when the time comes.
Not All Properties Qualify
While lousy credit doesn’t automatically disqualify you from getting a loan, it will make the lender more skeptical about your ability to pay back the money you borrowed.
What Are Some Ways To Protect Me? What Should I Do Before Signing Anything?
Before signing any contracts or agreements with hard-money lenders, there are some things that you should keep in mind:
Please Don’t Give up Equity Rights
When taking out these loans, many investors don’t realize how much control they’re giving away until they have already signed on the dotted line.
In most cases, borrowers aren’t allowed to sell their properties without paying off what is owed first—which can be problematic if market conditions change unexpectedly and leave them stuck holding a property.
Do Not Take On Any New Debt
Since hard-money lenders are mainly interested in the current value of the property, it’s essential to make sure that you’re not taking on any additional financial obligations that could strain your ability to repay the loan.
Get Everything in Writing
Before making a decision, be sure to have all the terms and conditions of the loan spelled out in black and white so that there are no surprises down the road.
As with any other type of financing, it’s essential to weigh all your options before deciding if a hard-money loan is right for you. By understanding what these loans entail, you can make an informed decision about whether or not this type of financing is right for your next investment property.
Common Mistakes Made By Hard-Money Users
Since hard-money loans are still relatively new to the lending scene, there is a lot of confusion and misunderstandings about what these types of funding entail.
Here are some common mistakes that users make when taking out this type of financing:
Not Knowing if You’ll Qualify
Since many people don’t understand how hard money lenders operate or what they’re looking for in an application, it’s easy for them to assume that their chances will be slim because their credit isn’t good enough.
When all they need is a more detailed plan regarding how they intend on making back investors’ investments quickly so as not to fall behind with interest rates and fees.
Getting One Loan After Another
by taking out multiple loans at once without having any equity built up, it’s easy for borrowers to fall behind because they don’t have a clear plan in place on how they intend on paying back what is owed.
Hard Money Lenders vs. Traditional Banks
There are many misconceptions about hard money lenders—with some people believing that one should treat these types of loans just like any other mortgage process that you would go through with a bank or credit union.
In reality, there are quite a few differences between the two which potential users should keep in mind:
The Cost
Since banks and traditional financial institutions rely mostly on interest-based revenue models, their primary goal is making sure that customers get the best rates possible without having to tack additional fees onto their total funding amount. Thus, their interest rates are usually much lower than what you would find with a hard-money lender.
The Time It Takes to Get Approved
Since banks have more stringent qualification requirements, the approval process can often take weeks or even months instead of the few days typical for a hard money loan.
The Use of Your Property
When taking out a mortgage from a bank, you can use the property as collateral to secure the loan. This is not typically the case with hard-money lenders who are mainly interested in how quickly they can resell the property for a profit.
By understanding these fundamental differences, borrowers can decide which type of financing will work best for them and their investment goals.
Hard-Money Made Easy
The bottom line is that hard money loans can be an excellent option for those looking to get into the real estate market quickly and without having to jump through all the hoops that traditional lenders require.
As with any other type of financing, it’s essential to weigh all your options before deciding if this type of loan is right for you.
By understanding what these loans entail, you can make an informed decision about whether or not this type of financing is right for your next investment property.
If you’re still on the fence about whether or not a hard-money loan is right for you, be sure to check out some of the related articles on the sidebar.
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