Hard money loans are a type of asset-based loan sometimes referred to as short-term bridge loans. Since they lean on the property of the borrower as opposed to his or her credit, these hard money loans are popular among house flippers and developers. They aren’t the only ones who can benefit from hard money loans, however. Read on to determine if a hard money loan is right for you.
How does a hard money loan work
Through a hard money loan, a private individual or group of individuals serves as a hard money lender. This lender will provide short-term financing based on the value of the property or assets you’re willing to provide as collateral. For house flippers and developers, this property is often the building or land they’re planning to develop and sell. Almost any type of property can be used, from single-family homes to industrial parks or undeveloped land. Because these loans are provided by private investors, it’s really up to the hard money lenders to determine what they are or are not willing to accept as collateral for the loan.
The value of the property you use to back the loan will determine the loan amount you receive. These are short-term loans, often lasting 12 months, though some lenders are willing to extend hard money loans over a period of two to five years. During this time, you’ll be required to make monthly payments to the lender. These can be payments of interest only or interest plus principal. Again, since these are private loans, the terms will be determined by you and the lender you collaborate with.
When to consider a hard money loan
If a bank turns you down
Since hard money loans are offered by private individuals or hard money lenders instead of banks, the requirements to obtain the loan are often looser. While a bank may not be able to see past certain events (such as a foreclosure or recent short sale, or maybe a few credit issues), a hard money lender is more likely to see the value in the property you hope to develop and ignore the extraneous details.
If you want funds sooner rather than later
A typical bank loan can take 30 to 45 days before you’ll see any funds. With hard money loans, you could be approved same day and have cash in hand within a week. If time is of the essence, hard money loans have clear benefits over standard bank loans. When real estate is the name of the game, having cash in hand in a matter of days instead of months could be the difference between having your offer accepted and being out-bought by a quicker draw.
If you don’t want your credit to be a determining factor
Hard money loans are backed by the assets or property of the borrower, as opposed to his or her credit worthiness. This can be a great benefit to someone looking to avoid a credit check. For most hard money loans, the lender will want to see a property with 30% to 50% equity so he or she will feel secure in providing financing. If you have lots of equity but not such great credit, a hard money loan could be a good way of obtaining the short-term financing you need.
Good to know
While hard money loans offer a number of benefits to those looking for quick financing that doesn’t require superb credit, there can be downsides to this time of financing. First and foremost is their higher interest rates.
Since hard money lenders rely on the value of property for protection against default, they often require higher interest rates. Interest rates for bridge loans typically start at 15% or 18% but may be even higher. The exact rate will vary by lender. Most loan to value ratios for such loans are in the 65% to 75% range.
What’s required of hard money loan borrowers
Hard money lenders will look at the equity you have invested in the property to determine if the loan is something they’re willing to provide. If you have the capital to pay the interest on the loan and a solid plan for your property, contact a hard money lender for financing.