If you are an investor that has tried to close deals in a seller’s market, then you know the benefits of hard money loans. These loans are short-term loans that close much faster than traditional mortgages, and they are tailored to real estate investors. They are essentially short-term bridge loans. In this article, we will explain the ins and outs of a hard money loan and discuss one of the most trusted places to get a hard money loan.
What Is A Hard Money Loan
A hard money loan is a mortgage loan offered by investors instead of traditional banks. Since it does not involve banks, the time from application to closing is much shorter and is usually completed within two weeks. There are fewer regulations, and proof of income or money for the down payment is not a key factor. The application process is typically one to two days. If you are an investor and need quick financing, hard money loans are a viable option.
These type of loans depend on the value of the collateral, as opposed to the borrower’s ability to pay. While hard money lenders may ask for your personal financial information, the loan is typically not contingent on it. Because of this, hard money loans are more accessible to people with bad credit scores, are newly employed, or those who don’t have substantial credit history.
Since these loans rely almost solely on the collateral (the property value), the LTV or loan to value is typically less than that of a traditional bank. The LTV for these loans is usually 70% to 80%, with some lenders even offering 85% LTV. While they require a larger down payment, hard money lenders are not discriminant on how you fund it. Banks are picky about how and where you acquire your down payment.
Because the investor is taking on a greater risk by lending to applicants with less than stellar credit, the cost of these loans is higher than traditional mortgages. Typically these lenders charge a few basis points upfront to cover the loan fee, and the interest rates are higher than conventional mortgages. Since banks are not involved, the terms of these loans can be flexible and meet the needs of any borrower.
Hard Money Loans are Short-Term Bridge Loans
A bridge loan is just as it sounds. This is a temporary loan that bridges you financially to either more permanent financing or the sale of the collateral at which time you pay the loan. Bridge loans are short-term loans with typical terms of one to three years. In most cases, the payment structure is interest-only paid monthly followed by a balloon payment for the loan balance at the end of the term. Hard money loans follow this same format.
While all hard money loans are bridge loans, there are bridge loans that are not hard money loans. In most cases, an investor will not extend a hard money loan for an owner-occupied property. Owner-occupied homes require a lot more paperwork and trigger too many government regulations. There are bridge loans specifically tailored to owner-occupants, and they are used to bridge the financing between a homeowner who is selling their current home but needs their equity to purchase their new home. They use bridge loans to bridge that gap in financing.
When and How Are Hard Money Loans Used
Hard money loans work best when they act as short-term bridge loans for real estate investors. These loans offer investors quick financing to land that deal of a lifetime. Investors that benefit most from these loans are those that plan to flip or sell the property quickly (within a year). Since the interest rates are higher and the terms are short, this loan would not work as permanent financing for a rental property.
As noted, these loans are not suitable for owner-occupied properties, but if you are an investor and your credit is lackluster, a hard money loan can help you purchase an investment property. Some hard money lenders even base the LTV value on the property after the proposed improvements are made. This allows investors that plan on flipping properties to borrow even more money.
While they are not for everyone, hard money loans serve an important purpose in the real estate market. If you are looking for a short-term financing option, check out As Is Loans for some of the best rates and terms available for hard money loans. We offer loans in 40 states with an LTV up to 85%, and they will even finance 100% of your property improvements. We have been in the business of helping investors for over 30 years, and they can help you too.