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All About Hard Money Loans? — Complete Guide One Should Know

 

What is a Hard Money Loans?

A loan that is secured by real estate property is known as a hard money loans. These are considered loans of desperate remedy or short-term bridge loans.

These loans are used in real estate transactions, with the lender who is not a bank but an individual or company.

The Working of a hard money loan

Instead of the financial stability of the borrower, hard money loan lenders rely on the value of the property that is being used as collateral.

Banks that are traditional mortgage lenders, do not provide hard money loans these lenders are private individuals or companies.

Property flippers who plan to renovate and resell the collateralized real estate quickly within a year sought hard money loans.

The costs are higher and the borrower needs to pay off the loan faster than he would otherwise with a traditional loan. Most this types of loans duration is from one to three years.

Hard money lending is a type of investment business and many investors practice it.

Special Considerations for hard money loans

To the borrower, the cost of a loan is higher than availing of finance through banks or government lending programs. By offering the financing the lender is taking a higher risk.

But the increased expense is a tradeoff for faster access to funds the approval process is less stringent and the repayment schedule is also flexible.

This loan comes to rescue in difficult situations if someone needs short-term financing, and by borrowers who have poor credit but good equity in their property.

As this type of loan can be issued quickly, it can be used as a way to avoid foreclosure.

Hard Money Loan — Pros and Cons

  • The approval process for a hard money loan is much quicker than the process for a mortgage or other traditional loan through a bank, this is the first advantage of a hard money loan. Because of their focus on collateral instead of the applicant’s financial position the private investors can provide hard money loans quickly.
  • Lenders do not spend too much time going through the loan application, or verifying the borrower’s income, neither in reviewing other financial documents. The process will be even faster if the borrower has an existing relationship with the lender.
  • The lenders are not worried about delays or receiving timely repayments because in case of default by the borrower they have an even greater opportunity to reselling the property themselves and make money.
  • Because the property is used as the only protection against default, it has lower LTV ratios i.e. around 50% to 70% than traditional loans which have 80% and if the borrower is an experienced flipper then it can go higher.
  • The interest rates of hard money loans tend to be higher. The average interest rate for a hard money loan in 2020 was 11.25% in the United States the rates vary anywhere from 7.5% to 15%. The rates for hard money loans can be higher than those of subprime loans.
  • Another disadvantage being, hard loan lenders might decide to not provide financing for an owner-occupied residence because of regulatory oversight and compliance rules.

Conclusion

These loans are basically used for real estate transactions, these are money from an individual or company and not from a bank. All hard money loans use the borrower’s property as collateral.

It is usually taken for a short period of time, even if you can raise money quickly but they come at a higher cost and lower LTV ratio.

As it depends on collateral instead of the financial position of the borrower, the funding time frame is shorter. The loan’s terms can be negotiated between the lender and the borrower.

If the borrower defaults it can still result in a profitable transaction for the lender as he has the property as collateral.

https://www.compareclosing.com/blog/all-about-hard-money-loans/

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