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Hard Money Loans

When one hears about hard money loans, many begin thinking in the wrong direction. They start to assume that hard money loans are provided by shady dealers looking to get money from their clients by charging ridiculous interest rates that make it almost impossible to pay the mortgage off on time.


Before, many lenders would use their applicant’s home as security for extremely high loans that they were sure the applicant would not be able to pay off. If the borrower didn’t pay back the mortgage, the lender would start the foreclosure process. This is something that happened in the past; it doesn’t happen anymore. However, many people believe that this still does indeed happen because they have not used services used by hard money dealers in awhile.


More information about hard money loans can be found deeper into the article. There is information on what the loans are when they should be used and what the requirements are for someone who is looking to borrow money from these lenders.


Understanding the Purpose of a Hard Money Loan


When one needs a loan on a short-term basis, the best way to go is the hard money loan for the most part. It’s given to borrowers who own real estate and it typically enables them to receive fast cash to cover some expenses. However, funding doesn’t come from traditional lenders like banking institutions. The funding actually comes directly from investors. These loans are generally paid off in around a year, but sometimes extensions are offered to some individuals who may require additional time in order to pay the money back. In those special instances, the borrower may have an extra four years to pay the money back.


If one takes out a hard money loan, the one who borrows the funds will have to pay an amount of money each month in interest. Hard money lenders could provide thousands of dollars to a borrower, however, the total amount that’s being offered overall depends on how much the property is worth.


What applicants generally prefer when it comes to hard money lenders is that they care less about your credit score and more interested in finding the value of the property that is being used to secure the loan. One who is denied from a banking institution may be approved by a hard money dealer because their property is valuable enough to where the dealer approves it. Banks, sometimes, will not work with a person, but hard money lenders are typically willing to provide a loan.


Types of Property You Can Own When Applying for a Hard Money Loan


It really doesn’t matter, at all, what kind of property you own due to you still having an opportunity to receive a loan for a set amount of money. Different applicants could have completely different kinds of properties as collateral for the loan, including homes, spare properties, commercial properties, and so much more. Certain lenders would prefer to work with borrowers who hope to use their homes as collateral, but some will have more experience will all sorts of property.


When is it Best to Use These Loans?


Even though the hard money loans are very useful, they are just not useful at all in some situations. When one is buying a home and have a good chance of getting funding from a banking institution, then a hard money loan is not for you. However, if you don’t have a good chance of getting a bank loan, you should go for a hard money loan.


These are some of the reasons why one may choose to use one of the hard money loans:


  • Renovating a home in order to sell it for more money
  • Acquiring money for construction
  • Need funds but have a bad credit score
  • Need funds quickly instead of going through a huge process with a bank


Who Can Benefit the Most From a Hard Money Loan?


Many investors have many different reasons to use these loans, but it’s generally because they are able to get the money back much quicker than if they were to go through a traditional bank loan. Funding from hard money lenders usually comes in around a week or less. However, funding from banks typically takes more than a month, which can be rather frustrating for investors.


To have the opportunity to receive approval only shortly after you complete an application, and then receiving funding in less than a week is what draws so many people to the hard money loans over so many other types of loans. Even real estate investors use it so they can compete against other investors.


One of the biggest, most apparent reason for someone to choose a hard money loan is that they are simply unable to achieve what they want through a conventional loan or through banks. Credit issues such as foreclosures or short sales could happen to any of us, and it’s good to have this option.


Banks like to see consistency when it comes to income history. While you may have a good credit history, it all comes down to the consistency of it all, even if you have a good income now. In hard money lending, lenders may overlook that as long as they feel that the borrower will, in fact, repay the loan (and if there’s enough equity in the property).


Understanding Points and Interest Rates for Hard Money Loans


Points and interest rates that hard money lenders charge can vary from one to another and sometimes from region to region. Good examples of this are in California, where rates are usually lower because the state has a large amount of hard money lending firms. Competition in an area usually forces others to go lower.


In the hard money lending business, they take huge risks when compared to banks. This is a major factor in why interest rates are higher in hard money lending when compared to conventional loans. It’s pretty common for hard money loans to have interest rates of around 10%-15% and that the actual amount is determined by the lender and usually relies on them understanding the risks they will have to take on the person they are lending it to. It’s also pretty common to see these lenders charge points up by 4% of the total loan amount. As per the norm, the points and rates will vary depending on several different factors.


Typical Value Rations for Hard Money Loans


The most common way hard money lenders determine the loan amount is based on a ratio normally calculated around the value of a property. If a loan is set to improve a property, then the lender will have to make an estimate of what the furnishings cost after they are done. This loan is a lot riskier as the individual’s capital investment decreases as the lender increases the amount of capital put in. Due to that risk, the hard money lender will charge much more on interest/


In other cases, money lenders may be willing to lend a higher percentage of the ARV and may even finance the rehabilitation. While this may seem like a godsend, it may be masked as a way to increase the interest. It’s possible to see interest rates at around 15% to 18% at up to 5 to 6 points can be charged by the lender because of risks and the simple fact that the borrower doesn’t put any sort of down payment whatsoever. There are some very rare situations where the borrower is still able to make a profit even though the extremely high rate of interest and points charged.


Hard Money Loan Requirements


A typical lender is mostly interested in the collateral and how high it’s overall value is when compared to the cost of the loan being made when they make their decisions. The credit rating hardly matters to these lenders. If the borrower does have the appropriate capital to cover the payments, then the lender will usually overlook short sales and foreclosures on the borrower’s record.


However, lenders do consider what plan the borrower has for the property. The borrower does need to know if the plan will actually pay the loan off in total, of course. If the borrower plans to get a long-term loan after the improvements or if they plan to sell the property after the improvements then it would be a suitable idea.


How to Find a Hard Money Loan Lender


Luckily, it’s not that difficult to find a reputable hard money dealer. The first place to start would be to look on Google and to search the term “hard money lenders.” The search results will generally show companies and perhaps a compiled list of companies put together by bloggers or websites. These websites will have information about many different lenders.


You could also go to a local real estate investor club meeting in order to find a lender. They are typically found in medium to large cities and those who lend commonly attend. If there are no apparent lenders, you can always ask anyone there to see if they know any lenders that they could recommend. Conventional mortgage brokers and real estate brokers can refer you to lenders.


With the information in this article, you should now have enough knowledge to know whether or not you should get a hard money blender, why they are useful, where to find them, and more. While the high-interest rates are scary, it pays off because of the quick arrival of the loan and the fact that these lenders will work with you when none another will.


Before making a decision, let on of our experts at the Colorado Mortgage Pros help you find out exactly what loan is best for you.