When Should A Hard Money Loan Be Used?

A hard money loan is a short-term mortgage that uses the value of the property as collateral. They have several advantages over conventional mortgages from a bank. The money can be obtained more quickly than with a traditional mortgage. The qualification process is more flexible too, as long as the property meets an acceptable equity threshold. They often have higher interest rates than a traditional mortgage, but they often have shorter terms of only one to three years.

What Is A Hard Money Loan? 

Sometimes hard money loans are called bridge loans because they are used to finance a property until a traditional mortgage can be secured. Banks have strict loan requirements, a longer time to approval, and often have requirements for the property value, and condition of the property. A bank or traditional mortgage lender relies on the creditworthiness of the borrower to secure their loan. This is not the case with hard money lenders. Hard money lenders have a tangible asset that they can leverage in case of a default.

Traditional mortgage lenders typically want to see a credit score of 640 or above. They also need proof of employment, pay stabs that prove consistent income up to the past year, and a debt to income ratio under 50%. Some lenders have more stricter criteria, while others are slightly more lenient. National hard money lenders also have certain standard loan qualifications. They typically require at least a credit score of 550 or above, 2 to 3 months bank statements, the property locations and purchase price, as well as a CV or resume that details the borrower’s prior experience and projects.

Loans For Investors 

Hard money loans are perfect for those who wish to buy and renovate properties and then flip them for profit. They are also good for those who wish to purchase rental properties, or multi-family units. Hard money loans offer solutions for portfolio investors who own multiple investment properties. In many cases, a conventional mortgage cannot be obtained if the person already owns multiple properties and has between 4 to 10 mortgages. Hard money lenders are more flexible in these cases, as long as the person can demonstrate a track record of strong profits.

Hardproperty loans are also good for buy-and-hold investors who need a quick approval and funding time to make a deal go through. Investors can use hard money loans to compete with cash buyers and make their offer more attractive. The quick approval time of a hard money loan can be used to leverage a sale the same as if it were cash. This gives the investor an advantage over others who have to obtain a traditional mortgage.
Fix and flip investors love hard money loans because there is an option to pay the interest only as the property is being renovated. At the end of the loan, the flipper repays the loan when they sell the house for profit. Many conventional banks and mortgage companies will not even consider offering a loan for rehab properties.

Loans for Owner Occupied Homes 

Hard money loans are also an option for those that already own and live in their home. However, there are laws in place to help ensure that the homeowner will not lose their property by means of default. Sometimes hard money loans are referred to as last chance loans because they will lend to people who have exhausted their other financing options.

Hard money lenders fill a specific niche in the mortgage lending industry. This type of loan is great for people who have plenty of cash on hand for a down payment, but who do not meet the credit worthiness or other financial qualifications for a traditional mortgage. Hard money lenders will even give you money if you have a foreclosure on your record, which is something that conventional lenders would not even consider.

Typically, most hard money lenders will only finance 60 to 75% of the property value, and you have to come up with the rest on your own. Even though the interest rates are higher than a traditional bank, the term of the loan is shorter, and provided you can make the payments, you will have it paid off quickly. Most hard money lenders charge from 3 to 6 points upfront.

A hard money loan can offer options for both investors and private homeowners who need to get cash quickly. Because you will not have to fill out the extensive paperwork, a hard loan lender can get you the money that you need in a week or less. This allows you to make an offer on the home that you want, get money for repairs or renovations, or give you the money that you need until other sources come in.

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