How Do Hard Money Loans Work?
The term “hard money loan” might sound intimidating or even sinister if you don’t fully understand it. In this guide, we’re exploring hard money loans and when they might be helpful. Indeed, hard money loans are not the best method of borrowing money for most people, but they can be suitable under a particular set of circumstances.
What is a Hard Money Loan?
A hard money loan is considered a last resort for many people and isn’t usually ideal for the long term. They are generally for the real estate industry, and the person lending the money may not be a bank. Instead, they’re from companies or even individuals. Hard money loan interest rates are usually relatively high. They’re based on the value of the property you will be borrowing against, rather than how much you earn or your capability to pay back.
How it Works
Hard money lenders can make money with a relatively short turnaround and make income quicker than if lending money for more extended periods. Private individuals or even larger hard loan lenders may be a source of this kind of loan.
They are often used for people flipping properties. If you plan to make changes to a property and sell it within a few months, then the fact that there are higher interest rates doesn’t matter as much. The loan is repaid much more quickly, often with the property’s value as collateral. Most hard money loans work over a term of one to three years.
Hard money loans work like a variety of other loans. You may agree to a fixed term for the loan to pay it back and sign a contract with the lender. This is usually not a bank.
Once you’ve done this, you will be legally bound to repaying the loan with a risk of repossession of the property if you do not keep up repayments.
Complex money agreements can potentially be more flexible than traditional loan agreements. For example, depending on your situation, you may tweak things like the repayment schedules or other loan features. You also might borrow money from a direct lender, an individual who’s willing to work with you directly—not a global institution with strict policies.
Hard money loan interest rates can be over 15%, so they are not great for every scenario. Depending on the person or company you’re borrowing from, you might even be able to change certain aspects of the agreement. Borrowing from a company or an individual means that you might not be bound to the policies of a big bank, for example.
How Hard Money Loans Differ from Traditional Loans?
- There are many ways in which stiff money loans are different compared to traditional loans.
- You probably won’t be borrowing from a bank, with individuals and companies a more likely source.
- The loan may be more flexible depending on what you have agreed beforehand.
- The loan may be repaid in a chunk rather than in monthly installments; this can be agreed upon depending on your plans, for instance, quickly flipping a property.
- The hard money loan will probably be tied to a property, which may or not be the same as a traditional loan.
Pros of a Hard Money Loan
There are some positive features of this type of lending in certain situations. For instance, you need to raise money relatively quickly and turn around a speedy investment. You might be flipping a home or expanding a business. You might not want to be tied into long-term lending.
There are also hard money loans for bad credit because they are often tied to a property. However, you don’t necessarily have to prove that you can pay back the loan by any other means.
Another pro is that you borrow from a company and may either negotiate your terms or make changes to the lending midway through its term. Finally, owner-occupied hard money loans may mean that you can live in a home while renovating it.
Cons of a Hard Money Loan
There are some negatives. The short-term nature means that if something goes wrong, you might not be able to stick to your financial plan for repaying.
The high-interest rates in hard money loans can be a downside as well. This is because hard money loan rates are more pricey ways to borrow money, which only suits short-term projects.
You will also have to raise some collateral, and this can be a challenge for some people. Few lenders will allow you to borrow unsecured loans without collateral.
Who Can Use Hard Money Loans?
Hard money loans are best for property flipping. It means that you can recoup the cash pretty quickly and be in a position to repay the loan.
There are other examples; for instance, remodeling or buying a commercial business property.
Anyone can use these loans if it suits them, but there are a very distinct set of circumstances in which it is likely to work, and the fact that the loan is backed up by property is one of the crucial aspects of the borrowing.
Don’t use this sort of loan when a longer-term option might be better. It is not a replacement for a mortgage as it is repaid quickly, with a relatively large amount of interest.
How to Qualify for a Hard Money Loan
Qualifying for a hard money loan usually comes down to the details of the property you own or are purchasing. The lender may want to see many details about this property. A quick credit check might be required. The property is the collateral for the loan.
Because it can be a quick and appealing way for people to make money by lending their money, it usually doesn’t have the most rigorous credit checks to understand your history. Instead, statements will relate to the property and collateral.
Summing-Up
Hard money loans are one of the unconventional financial products that have gained a fair amount of popularity in recent years. Unless you are looking for a collateral-based loan suitable for months or maybe one or two years, this sort of lending should best be ignored. The temptation to use this instead of a mortgage is not a good idea. Consider the fact that the interest rates can reach 10% to 15% compared to mortgage rates, which sit below 4%.
Suppose you are looking to borrow for flipping a house or commercial property, and you have a suitable hard money lender you can work with. In that case, this could be an excellent solution for you and allow you to borrow for a short period rather than be tied into years of interest building up.
