Here are the main benefits this lending option offers to investors:. Hard money loans are a good fit for wealthy investors who need to get funding for an investment property quickly, without any of the red tape that goes along with bank financing. When evaluating hard money lenders, pay close attention to the fees, interest rates, and loan terms. If you end up paying too much for a hard money loan or cut the repayment period too short, that can influence how profitable your real estate venture is in the long run.
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Your Money. Personal Finance. Your Practice. Popular Courses. With hard money loans, the lender approves a borrower based on the value of the property being purchased.
The lender may do a quick check of your credit or finances, but in general, the process will be much less rigorous than it is with a traditional loan. This allows the process to happen more quickly, so borrowers can get their money in a matter of days as opposed to weeks or even months.
The downside of this process is that the lender takes on significantly more risk, which translates to a more expensive loan for the borrower. Hard money loans also tend to have short repayment periods — often just a few years. Compare this to traditional mortgages, which commonly come with or year terms.
Real estate investors who make money by purchasing low-cost properties in need of fixing up, making value-boosting repairs and renovations and then flipping the homes for profit may utilize hard money loans.
Because these projects typically happen fairly quickly, professional flippers often prefer faster forms of financing. Just how expensive are they? In September , the average rate on a conventional year fixed-rate mortgage was 3.
Hard money loans can also be more expensive depending on the preferred loan-to-value LTV ratio of the lender. Hard money loans can be a useful tool for those in need of financing through less traditional routes.
In general, these types of loans are best left to the pros. Molly Grace is a staff writer focusing on mortgages, personal finance and homeownership. She has a B. You can follow her on Twitter themollygrace. Loan Types - 7-minute read. Because the funds can be issued quickly, this is also an appealing option for homeowners at risk of foreclosure. Other common reasons for hard money loans include buying an investment property and flipping house s.
The biggest distinction between hard money loans and other types of loans, such as traditional mortgages, is your house secures this loan. This means borrowers with a less solid credit history will have an easier time being approved for hard money loans, as their financial background is not a factor in qualifying them. Fewer qualification requirements also mean the approval process can be much faster — getting you the money you need when you need it.
So how does it work? Although your creditworthiness does not play a role in qualifying for a hard money loan, there are still several factors the lender must consider before approval, including your home equity , debt-to-income DTI ratio, and loan-to-value LTV ratio.
Once approved, hard money loans can be issued very quickly. However, there is a tradeoff for this faster turnaround time — specifically higher interest rates and origination fees. Overall, hard money loans are more expensive because of the higher risk the lender is taking by offering the loan. The approval process for any loan breaks down to this: the lender reviews all background information to determine if you can reasonably commit to making the necessary payments.
In the case of a hard money loan, the lender is not digging into your financial background, so they are automatically taking a higher risk that you will default on the loan.
Hard loan lenders take this risk because the home is listed as collateral, meaning they can resell the property themselves if the borrower cannot follow through on their loan repayment. This higher risk is the primary reason for higher interest rates in hard money loans. In general, interest rates range from 2 — 10 percentage points higher than traditional mortgages.
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