What is a hard money loan?
When most people think about applying for real estate financing, they think about working with a mortgage broker or applying directly with a bank or a major lender. However, there are situations when these financial sources are not able to provide the funding that you need. You may have recently been told by a bank or mortgage broker that you should seek a hard money loan. Perhaps you have stumbled across the concept of hard money loans on your own through Internet research. Before you make the decision to apply for a hard money loan, you need to get a better idea about what these loans are and how they could benefit you in your current situation.
Learning More About Hard Money Loans
If you have been researching hard money loans already, you may be aware that the loan terms are seemingly undesirable, and you may wonder why anyone would consider agreeing to such loan terms. Hard money loans are funded by non-institutional sources. This includes private investors with deep pockets as well as private lending companies. These unique financing sources do not have the same rigid underwriting terms that bank loans have. In fact, they are usually only interested in the value of the property. Their primary goal when determining if they can lend money to you is related to their ability to recoup their money through the collateral if you default on the loan. Hard money lenders usually do not have any specific lending requirements related to your credit scores or personal finances. While hard money loan terms are not as attractive as bank loans, they are not intended to be used for the same types of projects that are funded by bank loans. These are two very different types of real estate loans. Without hard money financing, some very lucrative real estate projects would not be executed. Therefore, while the terms may not be ideal, hard money serves a critical role in the real estate world.
Exploring Hard Money Loan Terms
You may be wondering what specific loan terms that you can expect from a hard money loan. Each hard money lender offers different terms and charges different fees. In addition, the terms can vary based on the specific details of your loan request. It is not possible to know the terms that you may be offered until you formally apply for a hard money loan. However, you can reasonably expect the interest rate to be close to or even higher than some credit card interest rates. You can also expect a term length of six months to 18 months, but some lenders have terms outside of this range. The payment is usually interest-only, and the final loan payment due is a balloon payment.
Finding a Hard Money Loan
Before you can determine if a hard money loan makes financial sense for your project, you must obtain a few quotes and crunch numbers. Many hard money loans are used to flip or renovate a project. In the case of a commercial property, a hard money loan may be used to finance the repositioning of a property, such as through stabilization of income and through renovations. The financing terms that your loan request qualifies for will play a major role in how financially beneficial your specific real estate scenario is. Remember that you can request alternative loan terms if the initial loan terms offered to you are not acceptable. You can also reach out to other hard money lenders for quotes.
When you are looking for long-term financing and when your loan scenario conforms to bank underwriting guidelines, it makes sense to apply for a bank loan. However, when short-term financing is needed and when the loan scenario does not meet standard bank guidelines, a hard money loan is a great solution. Now that you know more about hard money loans, you can more strategically take advantage of this financing source going forward.