Hard Money Loans – A Quick Description
A hard money loan is a monetary advance given by a small, private group financially invested in the project or a private individual. It can also come from a group of private investors who have already combined their financial assets and work with a loan broker to issue loans to qualified people. The hard money lender is willing to accept any and all risks which come with lending the funds.
The traditional loan process happens through a large banking institution and most certainly involves a lengthy approval process with lots of red tape. A hard money loan is quicker to obtain because it does not require a credit score and it is more readily available for those who need money quickly. They can be funded as quickly as 72 hours after the final loan agreement.
A hard money loan uses the property being purchased as collateral. The interest rates are also much greater than a conventional loan method, but it’s possible to borrow up to 70-percent of the total property value with a hard money lender. Developing a positive relationship with the lender will help develop flexible terms and minimize any extra costs. Be prepared to pay fees which are certain to occur, such as an underwriting fee, processing fee or a document preparation fee.
Real estate developers and house flippers are some of the biggest proponents of hard money loans, because they can use the short approval time to their advantage. Being able to close a deal quickly is a tremendous plus to those buying in fast moving markets. Many house flippers will use a hard money loan to purchase a property, make quick improvements to it and then use the new value of the property to take out a traditional loan with a banking institution. The traditional loan can then be used to pay the hard money lender funds.
Mortgage refinancing is a particular type of hard money loan. An investor pays off a loan tied to the property during mortgage refinancing which results in a bigger principal balance. The borrower then rolls the cost of the new loan into the principal balance or pays the costs out of the new loan out of their own funds. An investor can take on a newer, bigger loan and then use the net of the proceeds in a cash-out refinance.
A bridge loan is very similar to a hard money loan. It can be used when buyers want to purchase a new home before selling their old one. A bridge loan essentially does exactly what its name implies as it bridges the gap between the two big investments. Many buyers utilize these when purchasing a new home or when buying commercial property real estate.
A hard money loan is an excellent route to take when looking to invest short term or when traditional methods of financial loans have failed. It’s important to be informed and aware of all options available.