Hard money loans are short-term loans used to purchase real estate properties. With the housing market fluctuating as it has in the past decade or so, many individuals are choosing to purchase real estate properties with the intent of fixing them up and reselling them for a profit. Hard money loans are the type of financing most often chosen to make these purchases. Many potential buyers have a difficult time making the purchases because they’re unfamiliar with hard money loans and how beneficial they can be.
What are Hard Money Loans?
Hard money loans are short-term loans secured with real estate property and used to purchase the real estate. Unlike traditional mortgage loans, which are funded by banks, credit unions and lending institutions, hard money loans are funded by private investors or investment groups. Interest rates may be slightly higher than regular mortgage loans, but the process for hard money loans is much quicker and easier. It’s not unusual for a borrower to have access to funding within just a few days of applying if the property value is adequate. Hard money loans are typically used fix-and-flippers, which are individuals who purchase property cheap, fix them up and resell them for a profit.
Differences Between Hard Money Loans and Conventional Mortgage Loans
Since most conventional mortgage loans are also secured with the real estate they’re used to purchase, you may be wondering how they’re different. There are several differences between conventional mortgage loans and hard money loans. When potential homebuyers purchase property with a mortgage loan, they must have good credit, good financial history and steady income. Additionally, the real estate must be valued at an amount equal to or higher than the loan amount. With hard money loans, the value of the property is basically the only criteria. There are other differences as well.
• Hard money loans have terms of about six months but may be extended up to five years. Conventional mortgage loans can have terms up to 30 years.
• There are fewer requirements for hard money loans.
• Hard money loans usually have interest-only payments, which make them lower than mortgage payments.
• Although the borrower’s credit may be checked, it’s more for possible bankruptcies or foreclosures than for credit scores.
• Hard money loans are usually used by real estate investors.
• Borrowers may get up to 100% of the purchase price with hard money loans as opposed to 80% with conventional mortgage loans.
Pros and Cons of Hard Money Loans
As with every type of financing, there are pros and cons to using hard money loans. Pros of hard money loans include the following.
• Flexibility – Hard money lenders are often more willing to work out a payment schedule that’s convenient to the borrower.
• Quickness – Hard money loans may be approved within days of the application date and appraisal of the property.
• Easier approval – Because the property value is the only really important factor, it’s much easier to be approved for a hard money loan if the loan-to-value (LTV) ratio meets the hard money lender’s requirements.
• Multiple loans possible – An approved borrower may have more than one hard money loan at a time.
Here are some cons to hard money loans.
• Cost of hard money loans – Because of the higher interest rates, hard money loans can be more expensive than traditional mortgage loans.
• Time- Hard money loans have short terms and may need to be paid in full before the property is sold, which can be difficult for fix-and-flippers.
• Lenders – There are not as many hard money lenders as conventional lenders, so borrowers need to find hard money lenders.
• Location – Hard money lenders generally work in certain areas, and the property may need to be in a certain geographic location.