For those looking for an alternative of getting a loan to alleviate a financial emergency, hard money loans may be an option to consider. However, these kinds of loans differ from your typical loans distributed by banks or other major financial institutions.
What is a Hard Money Loan?
A hard money loan is a form of real estate loan which is made based off of the value of the collateral you have. This collateral is the property itself, as opposed to your creditworthiness or your ability to pay the loan back.
There are actually different forms of hard money loans with their own unique attributes. Bridge loans permit someone to buy properties quickly with the goal of swift reselling or refinancing.
Fix and flip loans allow someone to purchase a rehab property and fix it back quickly so it can be resold.
An owner-occupied loan allow consumers who do not qualify for other forms of financing to get a property for themselves.
Construction loans will allow real estate developers to get started on new construction projects with the goal of a quick refinancing.
How Do They Work?
Unfortunately, hard money loans are not available to everyone because they are most commonly used for investment purposes. Therefore, if the loan is going to be used for reasons other than real estate investments, then getting a hard money loan will be hard to come by. Certain consumers may be lucky enough to get one, but this may interfere with certain regulations regarding the loans.
Hard money loans are only dispensed for a brief period of time and repayment only requires interest-only re-payments. Sometimes, no payments at all may be necessary. This is one of the perks that comes with hard money loans, especially to real estate investors. The length of the loan is short, and the application process is relatively easy. In addition, the financing process is also quick.
Lenders will require some cash up front from the borrower based on the Loan-to-Value ratio (LTV), or the After-Repair-Value (ARV). In terms of repayment, it is usually one balloon payment at the end to cover the principal and any outstanding interest or fees attached.
What Makes Hard Money Loans Different from Traditional Loans?
Perhaps the biggest difference between a hard money loan and a traditional loan is the distributor. Traditional loans are typically given out by banks or major financial institutions. As for hard money loans, they are distributed by private organizations or individuals who have drastically different terms along with higher interest rates.
These private organizations also tend to be much more forgiving of bad credit ratings or even bankruptcies that could prevent the same borrowers from getting a mortgage. The greatest concern for lenders of hard money loans is not the ability for the borrower to pay the money back, but rather the value of the collateral.
In the case that a hard money loan is used to purchase a home, lenders will have to obey Dodd-Frank regulations which requires verification for a borrower’s ability to repay.
It is important to consider that hard money loans lack government oversight, have higher fees than traditional loans and have a brief payback periods. All of these options must be pondered before taking this kind of loan