Do you need some extra money for a major project or even to help you with financial hardship? Getting a loan may be a viable option for you, but there are so many types of loans out there. This can make finding the right one for you challenging.
Have you considered a hard money mortgage? This is an option if you do not qualify for other forms of financing but need funds quickly. How are these loans different than the traditional options? Keep reading to find out more about a hard money loan and if this loan is right for your needs.
What Is a Hard Money Loan?
This unique type of loan is secured with real property and not a borrower’s creditworthiness. It is similar to a short-term bridge loan and is primarily used for real estate transactions when the lender is either a company or an individual. Banks do not offer hard money loans.
These loans are typically for around one to three years and are a common way to collect money quickly. For example, you want to buy a house but your current house has not sold, you can use your current house as collateral and get funds for your new home.
The term “hard money loan” refers to the “hard” asset used to secure the loan (like real estate). If the borrower does not repay the loan, the lender will take the title of the asset to satisfy the debt.
How Do These Loans Differ?
The biggest difference between hard money loans and other types of loans is your house secures the loan. If you do not have a solid credit history, it will be easier to get approved for these loans because your financial background is not a determining factor.
There are also fewer requirements to get approved, so you can get the money faster and when you need it.
Hard money loans are commonly used for flipping real estate, which is fixing up a house and selling for a quick profit. This is because this is a short-term loan unlike a mortgage when a homeowner buys a new home they plan to live in for years. After the house is fixed and sold, the hard money loan is paid off with the sale proceeds.
These loans are also used for a short-term bridge loan while you wait for your current house to sell and also if someone is facing foreclosure.
How Does It Work?
There are several factors that are considered before approval since your creditworthiness is not one of them. These factors include the debt-to-income ratio (DTI), your home equity, and loan-to-value ratio (LTV). These loans are then issued very quickly.
What’s the tradeoff for a faster turnaround time? This means more origination fees and higher interest rates. Overall, these loans are more expensive because the lender is taking a higher risk with this loan.
Hard Money Mortgage Lenders
These lenders are individuals or private companies, not your usual bank. These lenders tend to offer more flexibility with loan terms and you may have more room to negotiate than you do with a bank.
The Interest Rate
Another large difference is the interest rate on a hard money loan, which tends to be higher than your average mortgage rate. You can also see a larger range in the rates between companies. A hard money loan interest rate can range from about 7 to 15 percent annually, compared to the average of 3 percent in 2021.
What Do You Need for This Loan?
The lender focuses more on the value of the property than the borrower’s ability to pay the loan. This means the lender wants to know more about the property and make sure the property is worth the money and has the appropriate equity. If you are using this loan to flip real estate, you may also need to document your experience with buying and selling other real estate properties.
Do You Need a Downpayment?
Yes, most lenders want a down payment for a hard money loan, and usually more than that for a traditional mortgage. Depending on your assets and loan needs, you may need to supply up to 50 percent of the loan. Lenders usually loan a smaller percentage of the property value, so these loans are not typically for the entire value of the property.
Is a Hard Money Loan Worth It?
A hard money loan may not be perfect, but it is a quick method of borrowing. The interest rates are higher and the fees may be higher, but if you are facing some negative items toward your credit like possible foreclosure, a hard money loan may be worth it.
The short time frame is convenient and can also be risky if things don’t go according to plan. This can mean a structural surprise or material delay that causes a project to take longer than expected. You may face a cash flow squeeze.
You also have to be careful that you understand how long a project will take. You don’t want to risk losing your house because the term of the loan ended.
Looking for a Hard Money Mortgage?
A hard money mortgage may be a great option if you need quick funds and do not qualify for traditional forms of financing. You may pay higher interest rates over the cycle of the loan; however, the loan is short-term. It’s important to understand all the pros and cons of hard money loans, and also know your alternatives to help you find the right option for your needs.
If you want to learn more about a hard money loan, contact us today. We are here to help you with your financial needs when a conventional loan does not suit your needs.