Understanding Hard Money Loans And Who Qualifies For Them

As time goes on, it seems like more and more people are turning towards hard money loans. One of the most common questions people have is what are hard money loans? Many people have heard of these but aren’t really sure where to begin or when to use them. In addition to answering what these types of loans are, we’re also going to talk about a few other things, including the benefits, drawbacks, and when you should use one of these loans.

What are Hard Money Loans & How do They Work?

In short, a hard money loan is a loan that uses real estate as collateral. They are considered a type of bridge loan and are great options for those that haven’t been in business long or have bad credit. Most of these loans are used for either buying or refinancing real estate properties in order to use them for investment opportunities. The lender will consider how much the property is worth against how much you want to borrow. They usually go up to 70% of the property value, but some might approve borrowers for higher amounts.

Qualifications

The exact qualifications will differ from lender to lender, but there are a few things most will require. The great news is that most lenders won’t focus on your credit score and some don’t even look at it. In addition, you’ll need to pay a down payment. We’ll talk about common down payment terms below, but it’s important to expect this expense. Another qualification that you’ll need to meet is ensuring the amount you’re asking for isn’t more than what the property is worth. Finally, you’ll need to come up with a good plan that has a low amount of risk.

When to Use

There are a few instances when a hard money loan should be used. For starters, it’s great for those that need to be funded quickly. In many cases, one of these loans can be paid out within a week. Another situation that works well with hard money loans is those where the borrower doesn’t have the best credit, or they haven’t been in the real estate business for long. Finally, you should try for one of these loans if you’ve been denied by more conventional banks.

Applying

Once you find a hard money lender that you can work with, you’ll want to start the application process as soon as you can. This starts with setting up a meeting with the lender, as well as asking any questions like what they specialize in, what the rates are, and how much of a down payment you’ll need. Next, you’ll work with the lender to create a contract. Make sure you read everything to ensure you’ll be able to easily pay the loan back. The next step is to let the lender know how much you’re trying to borrow, and you’ll work together to get the home appraised. Get any other documents you’ll need and wait for the lender to either approve or deny your request. Visit National Payday Loan Relief | Payday Loan Consolidation for more info.

Down Payments

While it’s expected to pay a down payment on most bigger loans, the lenders that offer hard money loans usually require a higher amount. Most of the time, they’ll require 75% or more of the property’s value. With that said, though, some lenders will allow you to put down a lower payment or not require it at all. The only issue with that is the lender will charge very high-interest rates, usually between 15%-18%. As a result of this, most borrowers try to pay the highest down payment that they can.

Interest Rates & Points

The exact interest rates or points that you’ll be charged will be different from lender to lender. Some states, like California, have lower rates than other states. The best thing to do is talk to the lenders you’re considering and see what the rates will be for your situation. You should expect to pay anywhere between 7.5% to 18%, but you could pay more or less than those. Some lenders will do points instead of interest rates, which are fees that help with any administrative costs and help reduce how much risk the lender is taking. One point is equal to 1% of the loan and most places will require anywhere between 2 and 10 points.

Benefits

There are quite a few benefits with these types of loans and many people find that they outweigh the drawbacks. For your convenience, we listed some of these benefits below.

  • These loans can get approved quickly, sometimes within a week of applying.
  • Most terms can be easily negotiated.
  • Some lenders will allow you to use other things for collateral, such as your retirement account or a home you stay at that’s under your name.
  • You don’t have to have perfect credit or extensive experience.
  • There’s a higher chance of being able to get multiple loans funded.
  • These lenders have competitive rates and terms.

Drawbacks

As with everything in the world, hard money loans also have some drawbacks. Most people find that these aren’t enough to sway their decision, but some might not be willing to work with these. Just like we did with the benefits, we’ve listed some of the drawbacks below.

  • The payment terms might be quite a bit more than those from traditional banks.
  • You only have a short amount of time to pay the loan back.
  • Most lenders will require a hefty down payment.
  • There could be higher fees associated with securing the loan.

Hard Money Lenders vs Other Lenders

The main difference between hard money lenders and traditional lenders is how they approve a loan. With traditional lenders, they look at things like your credit score, payment history, and what items are included on your credit report. Hard money lenders don’t usually use any of those things. They are more focused on how much you want to borrow, how much the property is worth, and how much the collateral is worth. As a result of this, hard money lenders are a little easier to get approved for than a traditional lender.

Now that you’ve learned more about hard money loans, you should have a better understanding of what you should expect. If these seem to match up with your situation, you should check out your options. If you still have questions, reach out to potential lenders and see what they recommend.

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