A hard money loan is a short-term loan that is secured by real estate. They are funded either by private investors or a fund of investors. This is different from conventional loans that are done through banks or credit unions. A hard money loan usually lasts around a year. However, the loan term can be extended to longer terms of between two and five years. The loan generally requires monthly payments of only interest or interest and some principal with a balloon payment at the end of the term.
Borrowers who cannot get conventional financing, usually due to a recent foreclosure or short sale, can still obtain a hard money loan if they have sufficient equity in the property that is being used as collateral as hard money lenders are primarily concerned with the property’s value, rather than the borrower’s credit. However, his or her credit is still important. These types of loans are generally used when the banks say “No,” because, the hard money lenders can still say “Yes.” This is because issues on a borrower’s record, including a foreclosure or short sale, can be overlooked if the borrower has the capital to pay the interest on the loan.
However, you need to be aware that since hard money lenders take on more risk with their loans compared to a conventional bank loan, the interest rates for a hard money loan can be significantly higher than that of conventional loans. Interest rates for hard money loans tend to range from 10 – 15 percent, depending on the lender and the perceived risk of the loan. In addition, points can range anywhere from two to four percent of the total amount loaned. These charges vary greatly depending on the loan to value ratio.
The benefits of hard money lending include the fact that they are generally less of a hassle than a traditional mortgage and the loan is only for a short period of time. Therefore, those involved in real estate flipping, real estate investing, and builders, as well as those with credit issues find these types of loans appealing.
Flippers purchase a home in disrepair and within a few months, fix it up and resell it for a profit. Since they tend to keep the home for less than a year, it does not make sense to apply for and/or obtain a traditional mortgage for 15 to 30 years. The same is true for those in the construction industry. Builders purchase a piece of vacant land, erect a house, and sell it within a year. Therefore, they do not need a long term, conventional mortgage.
Investors tend to use hard money loans when time is of the essence and they need to purchase a piece of real estate, but do not have the money. The same is true of those that have credit issues. If you have the down payment, but cannot get a mortgage from a bank, then it is worth looking into a hard money loan, at least for the short term, until things turn around.