You Should Think Hard About a Hard Money Loan
Real estate investors, home flippers, developers, and renovation contractors all utilize Hard Money Loans as a fast and easy way to obtain funding. These types of loans can be a fast and easy way to get a purchase done on your investment, without having to go through the traditional financing process or the approvals required from a typical financial institution. Traditional financial institutions do not offer hard money loans, which is why this loan option is available only through private lenders and individual investors.
Considering you can typically obtain the loan within days (as opposed to weeks with banks), it is a great option for home flippers and property developers. In fact, anyone who has some spare cash, or a stake invested in your property investments, could get brought on board as a private money lender, assuming they comply with all lending laws. Even if you are not a first-time investor in a property, the hard money lender will want to get to know enough about you before approving a hard money loan. Some lenders will even take in other assets, such as a retirement account or a residence in your name, as the basis to kickstart the loan.
Hard money loans are also an option for investors who just need to make a few quick fixes to increase a property’s value, and then get another loan on the new value to pay the hard money lender back. The loan amount that the hard money lender is allowed to make is determined by a ratio of the loan amount divided by property value. The loan amount lenders make is determined by their property specialty, if there is one, and what kind of risks they are comfortable taking.
Traditional lenders pass on taking steps to minimize the amount of risk they assume in lending to a person. By making sure that a borrower from a traditional lender is creditworthy, lenders are able to offer better rates and generally more accessible finance. With these lower ratios, lenders know that they will be able to sell your home fast, and they have a reasonable chance of getting back their money.
Your loan-to-value ratio is lower with HMLs because lenders want to be confident that they will be able to extract money from your property should you default. At the end of the term, borrowers have the option of refinancing and turning an HML into a regular loan, or the borrowers could sell the property and repay the HML. An HML is written with interest-only monthly payments, with a balloon payment due at the end of the loan’s term. Often investors and companies are the most likely parties to make the loan, and the loans are easier to guarantee.
Often, borrowers will need to pay points at rates between 3 percent and 10 percent of the loan amount, with terms of between six and 24 months. It is smart to think about actual dollars you will be paying over the life of your loan, not your APR. The effective points charged on your loan can be highly dependent on your transaction’s loan-to-value ratio (LTV), interest rates charged, and loan-related risks.