Hard money loans come with fast approvals that help investors secure profitable properties, and homeowners prevent foreclosure. They are also great sources for construction loans, land loans, and purchase loans. Hard money lenders set their own guidelines, so they have the flexibility that banks and credit unions can never compete with. As-Is Loans provides access to qualified, hard money lenders ready to help you obtain a new property and repair or save your current home.
What Is a Hard Money Loan?
Hard money loans are short-term loans secured by real estate. The real estate can be a residential or commercial property. Private investors fund these loans, which comes with several advantages. Most importantly, private investors can approve loans based on their own criteria, whereas a bank or credit union is bound by rigid underwriting requirements. Also, the investor can approve the loan in a very short period of time: often within days. Though the loans are short term, payments are based on a 30-year mortgage schedule, keeping them low. Interest-only options are available.
Hard money lenders offer flexible loan terms. The standard term is 12 months, but terms between two- and five years are also commonplace. The borrower takes out the hard money loan with the intention of either refinancing, selling, or paying off the loan balance before the term ends. If the loan runs past the term, a balloon payment equal to the entire loan balance must be paid.
Who Qualifies for Hard Money?
Anyone qualifies provided they have a sufficient down payment for a purchase or equity stake for a refinance. Each hard money lender has its own set of requirements, but most are willing to overlook bad credit, foreclosures, and bankruptcies, even if they are recent. Some do not even look at credit reports.
Where sufficient equity exists, many hard money lenders also do not look at the borrower’s income. The investors can afford to do this because they base the loans on the value of the property, not the borrower’s income or credit profile.
To those unfamiliar with this type of lending, hard money may sound like the old NINA (no income, no assets) loans that were popular in the early 2000s; however, hard money lending is fundamentally different. NINA loans are provided by traditional banks and mortgage lenders, and many require little or no down payment or equity stake. As a result, these loans are highly risky to the lender. Banks make these risky loans because they plan to sell the loans to Wall Street, so the bank does not bear the default risk.
Hard money investors do not sell loans to Wall Street, and, as small businesses, could never afford to take the risk of default when there is no equity in the property. Because hard money lenders require a low loan to value (LTV) ratio, there is always sufficient value in the collateral to cover them in the case of a default. For this reason, they are willing to lend to riskier borrowers and demand fewer approval requirements.
Most hard money lenders require LTV rations no higher than 65% to 75%, though this varies by the lender. Though they have few underwriting requirements, hard money investors often require borrowers to present a plan for loan repayment. The lender wants to see that the borrower has a realistic path to repayment, such as a plan to pay off the loan or refinance it into a long-term loan. Also, the borrower may have a plan to improve the property and sell it before the term expires.
Top 5 Reasons to Opt for a Hard Money Loan
1. You Are a Fix-and-Flip Investor
Fix-and-flip investors make big profits in a short period of time, but only if they buy properties in hot locations with high-value increase potential. The problem is that there are a limited supply of properties with these characteristics, and other investors and home buyers compete for them fiercely. Chances are that to land a golden property, the investor needs to act fast.
Why Banks Don’t Cut It
When fast action is needed, a bank is the last place you want to go. Underwriting can take months, and there is no guarantee that the lender will give final approval. When a fix-and-flip investor tries to buy a property with a bank loan, the competition simply offers to pay cash or uses a financing option that allows for immediate approval. Obviously, the investor using a bank loan is shut out of the process.
Hard Money Lands the Hot Properties
By using hard money, the investor can close on the property in days. Also, unlike banks, hard money lenders are willing to provide funds for restoration costs. They are able to do this by providing loans based on the after-repair value (ARV). For example, if a property is worth $100,000, and the lender requires a 70% LTV, the lender will loan more than $70,000 if the restoration plan will boost property value.
If the restoration plan boosts the value to $200,000, then the lender can loan up to $140,000, which is enough to buy the property and provide $40,000 toward home improvement costs. Hard money lenders focus on whether the deal makes sense from a financial perspective rather than credit scores and income.
2. You Have Home Equity and Face Foreclosure
Foreclosure hits borrowers with significant home equity the hardest. These borrowers have invested much in their homes through down payments, mortgage payments, and home repair and improvement costs. They should have the benefit of the home equity earned from their hard work. However, in a foreclosure sale, fees, penalties, and a below-market sale price usually destroy all equity the owner built.
Hard money can save this equity. Because hard money lenders are not concerned about credit scores or income, the borrower can get a loan that pays off the current lender and saves the home from foreclosure. For example, if a borrower faces foreclosure because of a long period of unemployment, he or she can save the home with a hard money loan. Then the owner has time to rebuild his income and credit and refinance or sell the home and extract the equity.
3. You Need to Buy a Home But Have Bad Credit
Millions of people suffer from financial calamities that force them to fall behind on loan payments, lose their homes, and go into bankruptcy. Unfortunately, banks and credit unions won’t lend to these borrowers until a significant time period has passed. For example, after bankruptcy, most people will need between two and seven years to qualify for a traditional mortgage, depending on whether they qualify for FHA, VA, USDA, or conventional mortgage loans.
What if you need to buy a home before this time period expires? A hard money lender can make it happen. Provided you are able to meet the lender’s LTV requirement, you can be approved right away, even with a recent foreclosure or a pending bankruptcy.
4. You Need a Construction Loan
When applying for a construction loan with a bank or credit union, approval is difficult to obtain. Financial institutions consider construction loans riskier than mortgages because the collateral has not yet been built. As a result, they charge higher interest rates, require large down payments, and have extremely stiff underwriting requirements.
Obtaining a construction loan through a hard money lender is far faster, and approval is likely, provided you can meet LTV ratio requirements. By using a hard money lender, you can get your construction project underway without delay, and if a bank or credit union denied your construction loan application, a hard money lender might say yes. Since both hard money and construction loans are short term, hard money lenders make good sources for this type of financing.
5. You Need a Land Loan
Land loans can also be tough to get through banks or credit unions. If you are in the market for land, the process can be simplified by going through a hard money lender. Hard money lenders evaluate the value of the land and base approval on whether the deal makes sense. If the land’s value is sufficient, you can be approved in days and get title to that valuable land before the competition.
Hard money lenders provide an important service to homeowners, homebuyers, and real estate investors. By providing an alternative to the slow approval process at banks and credit unions, hard money lenders ensure that their clients can close on properties quickly, avoiding the prospect of losing a golden opportunity to the competition. Hard money also helps save homes from foreclosure and give borrowers with bad credit a chance at homeownership.
When You Need a Loan
If you need a fix-and-flip loan, a foreclosure rescue loan, a purchase loan, a construction loan, or a land loan, a hard money lender can get you approved right away even if you have bad credit. Call AS-IS Loans today to access competitive hard money that gets approved fast.