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Getting the Basics of Hard Money

Need access to funds for your home purchase or business? Are you having difficulty getting a loan from traditional mortgage or business lenders? A hard money loan may be just for you.

Hard money vs. traditional loans

A hard money loan is a way for you to get funds more quickly and without going through a lot of requirements that you will usually have with traditional loans. These usually involve presenting a good-enough credit score, having a decent debt to income ratio and undergoing a thorough evaluation of your future capability of paying off the loan.

With hard money loans, the loan is granted based on your assets or collateral. The loan does not consider your current or future ability to pay off the loan. The loan amount will also be based on the value of the collateral. Thus, the process for evaluating your loan application will be faster.

You can apply for a hard money loan for a variety of real estate – a house, commercial property, industrial property or land. However, some hard money loan companies may prefer to focus on a particular property type.

A hard money will usually have a loan term of an average of 12 months, though some can be extended to as long as 5 years. You may have the option of paying off the entire loan at the end of the term, with monthly payments to cover the interest. Another alternative will be to have monthly payments that cover a portion of the principal and once the loan term ends, you need to cover the rest of the principal with a balloon payment. If you cannot pay off the loan at the end of the term, the lender will simply take the collateral and sell it off in an effort to recover the amount loaned to you.

Who should apply for a hard money loan?

Hard money loans meet the needs of the following:

–          Those who want to buy a piece of real estate and need to act fast.

–          Those who have gone through a rough financial patch (i.e. a recent foreclosure) and need a chance to recover

–          Those who have experienced a hit on their credit rating and are thus finding it hard to get a loan from the bank

–          Contractors who need a commercial construction loan to help finish the project

–          Those who are in the fix-and-flip business. These are investors who buy a property, fix it up and sell it at a considerably higher mark-up.

The key is that you have a good piece of property or asset that you can present as collateral. It is important to note, though, that hard money lenders may not grant loans to those who live in the property that was meant to be the collateral.

What are the disadvantages of hard money loans?

Hard money loans are more expensive. Because of the higher risk involved with issuing a loan to someone who has not shown his financial capacity to pay it off, hard money loans will come to be more expensive that traditional loans. Hard money loans will charge higher interest rates.

The loan amount may be quite lower than the value of the collateral. Hard money lenders will have a low loan-to-value ratio. For instance a loan-to-value ratio of 50% means that you will get to loan only half of the value of your collateral. This is the lender’s way to mitigate the risk they acquire by granting you a loan.

Shorter loan term. With a traditional loan, you have more years in which you can pay off the loan. On the other hand, hard money loans have shorter terms, which means that you need to produce the loan amount (plus the interest) within that period.

 

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