A hard money loan is a mortgage that is backed by real estate. This type of loan differs from a conventional bank loan because the property itself is used as collateral. They often have higher interest rates been than bank loans and can go as high as 21% in some cases. They also have shorter loan repayment terms, ranging from 1 to 3 years. It is possible to obtain the funding in as little as a few days or up to a week. This is much quicker than a conventional loan, that can take 30 to 60 days, or even more. These loans are popular for people who have short-term financial situations and need the money quickly, but for whom conventional loans are not an option.
Sometimes these loans are called asset-based loans, private loans, or bridge loans. They are called private loans because sometimes the lenders are private individuals, rather than lending companies. They are called a bridge loan because they can be used as temporary funding solutions until a conventional loan can be obtained. They are used by both investors and consumers who live in their home.
Things move quickly in the real estate market and sometimes a good deal can be gone almost as soon as you find it. Perhaps you found your dream home, but there are already other bids in on the property. In this case, speed is important and it is not possible to obtain conventional financing quick enough to be able to secure the property. This is when hard money loans can be the solution to gaining an advantage over other bidders. In this case, a hard money loan is used as a bridge to purchase a property until a conventional loan can be secured. A conventional loan can be used to repay the hard money loan and obtain better financing terms later.
This is the best scenario for using a hard money loan to purchase a property. The hard money loan gives you the ability to act as a cash buyer, which can be more attractive than other buyers who have to wait on the bank. The caveat is that one has to be certain that they can obtain a conventional loan for that particular property. Hard money members will often make loans for distressed properties that will gain value once they are rehabbed. Conventional banks often have standards that do not allow for the purchase of distressed properties or properties below a certain market value.
Loans For Landlords
If you already own a home that you live in and have thought about getting into the rental business, a hard money loan may be one way to do it. If you have equity in your home, you may be able to get a loan from a conventional bank. However, there are many circumstances that can make this impossible. If you have ever been late on payments for your mortgage, or you have a high debt to income ratio, a conventional bank may not be willing to give you a second mortgage.
A hard money lender may be willing to allow you to take out on loan on the property you intend to a purchase, leaving the one you live in out of the deal. Whether they are willing to do this or not depends on the value of the home you live in and the value of the one you intend to purchase. Hard money lenders will also allow you to buy cheap property and fix it up, whereas banks will often not allow this.
Money for Fixer-Uppers
If you intend to buy a house and that is a handyman special, you will need to borrow money for both the house and the renovations. Conventional banks will not lend money for houses that do not have the value in them already. You have to have equity in an existing home in order to get a renovation loan through a conventional bank. This is not the case with a hard money loan. They will often provide renovation money for that diamond in the rough based on its future value.
There are many circumstances where a bridge loan can be the best option for getting your dream home, even if your dream home has a little to be desired at first. Homeowners that do not qualify for conventional loans find it easier to find hard loan money. Even though the terms are not as attractive as conventional loans, the house will be paid for sooner and you will not have a 30-year mortgage hanging over your head. Hard money loans can be the answer to getting your home faster, but you must consider both the up and downsides before you decide on this option.