What’s a Hard Money Loan … and How Can You Get One?
Hard money loans are an intriguing alternative to standard forms of lending, and they are popular among certain types of borrowers for a few reasons.
If you’re new to the concept of hard money loans, it’s important to get to grips with the concept and understand the benefits as well as the risks involved. So here are a few main talking points to expand your knowledge.
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What is a hard money loan?
Simply put, a hard money loan is usually provided to people who want to purchase property without having to go through the rigmarole of getting a traditional mortgage.
Hard money lenders can hand over the funds within a few days of an application being made, and they tend to fall outside the bounds of the usual banks and brokers that offer mainstream property loan packages.
People usually turn to hard money loans if they want to flip a property. Buying a dilapidated home, sprucing it up and selling it quickly to turn a profit is appealing, and this type of financing makes it a possibility for more people.
As such it shouldn’t be considered as an alternative to a mortgage if you are hoping to live in the property in the long term.
What are the advantages of a hard money loan?
One of the main perks of finding hard money lending near you is that getting approved is more straightforward. While a mortgage might require weeks of wrangling to get off the ground, and involve a thorough check of your financial status, the barrier to entry for hard money loans is generally lower.
This is because hard money lenders aren’t usually interested in things like your credit score or the size of your pay packet. Instead, they mainly determine whether or not to approve a loan based on the value of the property you intend to purchase.
Likewise because the property itself will be collateral for the loan, you won’t need to stump up a big deposit to get your foot in the door.
Furthermore, since hard money lenders operate outside the heavily regulated mortgage market, they can be more flexible in the terms they offer to borrowers. This can help to take your specific circumstances into account, and also afford you wiggle room with a bit of negotiation.
What are the downsides?
The speed, convenience and flexibility of hard money loans of course means that the individuals and businesses that offer them are invariably taking a greater risk when working with borrowers.
The upshot of this is that interest rates tend to be steeper than they would be if you were buying with a standard mortgage. In addition you may pay higher fees for closing, admin and other services than would be charged by a mainstream lender.
The second caveat is that hard money loans will require borrowers to repay the original amount plus interest in a far shorter span of time. While mortgages can play out over 20 to 30 years, hard money loans might have repayment schedules that are far tighter.
This goes back to the property flipping purpose of these loans. Operators in this field should expect to have a property brought up to spec and back on the market as soon as possible, hence why hard money loans work in their favor.
If you are confident you can deliver on a property project quickly, and you need a loan that matches your speedy turnaround expectations, the hard money option could be ideal. If you are buying a family home to live in, a mortgage is far better.