Many prospective homebuyers are interested in hard money loans. This type of home loan is a relatively easy and fast financing option. However, they are not always worth it for everyone.
But what exactly are hard money loans and should you consider one for yourself? Here is everything to know while deciding if a hard money loan is worth it for you.
What Is A Hard Money Loan?
A hard money loan is a short-term, non-conforming loan offered through a private company or institution. The only qualification factors considered are (1) the property and (2) the down payment. The private company or institution offering the “hard money” accepts assets or property as collateral.
With limited qualifications, comes fast financing and a significantly less stringent approval process. This makes for an appealing option if you need to purchase quickly, and may be denied a traditional loan.
Traditional loans may take anywhere from weeks to months to finance. A hard money loan can take just a few days.
Typically, the best suitors for a hard money loan are high-net-worth individuals or wealthy real estate investors who want to cut through the red tape that goes along with mortgage financing.
How Does A Hard Money Loan Work?
As mentioned previously, there is a significantly less stringent approval process for this type of loan. The lender approves the loan primarily based on the value of the property being purchased.
The lender may also examine your financial background including your credit report and any other outstanding loans. However, the requirements will be held at a much different standard compared to traditional lenders.
The benefits and drawbacks of a hard money loan are what make it so different than a conventional loan.
- Timeline: A hard money loan can close as quickly as 4 to 6 business days (depending on the company or institution). This is a great solution if you need to obtain the loan fast and do not have time to wait for lengthy procedures.
- Loan Amount: Most private companies offer loan amounts from $100K to $20MM (and sometimes higher).
- Difficult Property Types: A hard money loan is a better-suited option if you are purchasing a unique property or structure. This includes non-warrantable condos, non-conforming properties, etc.
- Guidelines: The guidelines regarding credit scores and debt-to-income (DTI) ratios are not considered in hard money loan evaluations. This makes the qualification requirements much less stringent as opposed to traditional federal lending guides.
- Interest Rates: Most often, a hard money loan has a high-interest rate compared to traditional mortgage loans.
- Down Payment Amount: This loan product typically requires higher down payments. As mentioned previously, the best suitors for hard money loans are high-net-worth individuals or wealthy real estate investors.
- Loan Terms: The loan terms for a hard money loan are generally much shorter than the 15- or 30-year conventional mortgages from traditional lenders. Full repayment can be required in just a few years. This means monthly payments are typically much higher.
What Are Common Uses For A Hard Money Loan?
- Commercial Real Estate: A hard money loan can be a great option for purchasing commercial real estate if you own a company or business.
- Property Flips: Often house flippers will utilize the hard money loan for repairs. House flippers generally benefit as they pay back the loan in a short amount of time. The idea is to remodel the purchase to sell and obtain a substantial profit to pay back the loan.
- Investments: If you are a property investor, you can benefit by obtaining a quick loan and not going through longer financing processes. This is assuming you already have the capital and collateral on hand.
What Alternatives Are There?
If you are uneasy about paying the loan back in a shorter timeframe, you risk losing the asset you utilize for collateral as well. This could negatively affect your financial situation.
It is important to weigh the pros and cons of your specific situation, and consider a potential alternative.
There are several alternatives to a hard money loan to consider. At JVM, we often recommend you get a home equity line of credit (HELOC) if you do not have enough cash for a down payment.
The Bottom Line
Hard money loans are a relatively easy and fast financing option. However, they come with a risky territory.
While they can be an excellent option for high-net-worth individuals or wealthy real estate investors, we recommend considering an alternative if possible.
Have questions? Schedule a call with one of our Client Advisors today.