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Hard money loans, also known as bridge loans, are a type of loan that falls outside of the traditional lending system. They are backed by real estate for collateral. These are generally short term loans that are typically 1-5 years in length.
What is a Hard Money Loan?
Hard money loans are a type of loan that is backed by real estate for collateral. Because they are outside of the traditional lending system, that means they don’t have to be approved by a bank or other lender before they can be used. Hard money loans are great for short-term financing needs and they typically come with higher interest rates than other types of loans because they’re much riskier than getting approval from a federally insured bank or credit union. These loans saw great expansion after the 2008 recession mainly due to the Dodd-Frank Act which put more regulations on banks and lenders.
What Can I Fund With a Hard Money Loan?
Fix & Flip / Bridge
Obtain capital to repair or flip a home. You can also use the capital to bridge the gap until another transaction is complete.
Rentals
This loan type will allow individuals to enter or obtain new rental properties to their portfolio.
Commercial
If a traditional loan is insufficient or you are unable to secure one then a hard money loan can allow you to build new or access funds for owner-occupied.
Transactional
Wholesalers and brokers can use transactional funding to buy and sell properties quickly.
Pros & Cons of Hard Money Loans
Pros
Fast Approval Process
There are less requirements by lenders than traditional loans. This leads to a quicker loan approval, which can lead to funding within a few days to weeks.
Based on Collateral, Not Credit
When you apply for a hard money loan, there are no credit checks or income verification. This makes the application process much easier than other types of loans.
Flexible Terms
Hard money lenders don’t use the usual underwriting process as would a bank. Lenders will work with borrowers on a individual level to make it work for both parties.
Cons
Higher Rates
While hard money loans can be a helpful tool for people who need quick cash, they’re also expensive. Interest rates can be as high as 25% per year, and origination fees are typically around 2% to 3%.
Lower Loan to Value Ratio
Hard money loans can have a LTV ratio of 50%-80%, compared to 75%-80% for traditional mortgages. If you don’t have equity in the property then your down payment will have to make up the difference.
Restrictions / Regulations
Some lenders may not provide loans for owner-occupied properties. In addition there are state and federal laws that can hamper the lender’s ability to work with some borrowers.
What is the Process of Getting a Loan?
Hard money loans follow a similar process as traditional loans. The main difference in process is the timeline from start to funding is generally within days whereas a traditional loan can take 30 days or longer.
- Find a property that you wish to purchase
- Find a reputable hard money lender
- Pre-qualification where the lender will evaluate the borrower and property
- Loan application
- Processing & Underwriting
- Approval & Closing
Choosing a Hard Money Lender
When selecting a hard money lender it is important to consider several factors to ensure you get the best loan to help you achieve your purchasing goals.
- Years in Business – An experienced lender will provide invaluable support and could better rates.
- LTV – Understanding how they calculate the LTV (purchase price vs. after repair value).
- Location – Some lenders only do deals in the state they are located.
- Loan Requirements – Each company can have different repayment options, so find one that is right for you.
- Property Type Expertise – Some lenders prefer and lend more often to specific properties so make sure your type is one they prefer and have experience with.
FAQs About Hard Money Loans
Who is Eligible For a Hard Money Loan?
Anyone is eligible for a hard money loan. There are no credit requirements and the property’s value is used to secure the loan. Hard money lenders like to see borrowers with at least 2 years experience as real estate investors before they will consider providing someone with a hard money loan because they will trust that the investor has a track record of success and can pay them back without issue.
What is the Process for a Hard Money Loan?
After finding a reputable company you can start the application process. The lender will view your loan amount and compare that to the value and equity within the collateral. If they deem
How are Hard Money Loans Different Than Traditional Loans?
Hard money loans have less requirements than traditional loans. They are also provided by individuals, private equity or investment funds compared to banks or credit unions. They are also a much faster option than traditional loans which can allow you to buy a property quickly.