The hard money loans or private loans are a type of short-term loans that are secured by the real estate. They are funded by the private investors or fund from the group of investors. Also, they have terms of 12 months, but can be extended up to 2 to 5 years, which depends upon the lender. The private money lending needs monthly payments:
- Interest only
- Interest and some principal: at an end of a term, you will pay the balloon payment (lump sum payment due after the balloon loan, like private money loan)
You are thinking how much money the lenders will actually lend to borrowers; and that amount will be based primarily on the property’s value. So, property is one that the borrower is acquiring and that they own or want to use it as a collateral.
Why to Use Hard Money Loans?
If you think hard money is costly, why will you use it? The hard money has got its place for some borrowers who can’t get the traditional funding whenever they want it.
Unlike the conventional lenders, the hard money lenders can operate on their own and individual loan criteria. For residential rehab market, most of the homes that the investors look to acquire do not meet the FHA guidelines that means lenders cannot write loans. This makes it totally impossible to get conventional financing.
The hard money loan lenders have got complete freedom of overlooking the regulatory constraints banks face that allows us to approve the buyers fast as well as make a holistic assessment of the borrower’s credit. The hard money lenders base the borrower’s approval over the merits of a project, and agreeing on the viable exit strategy for paying this loan off before the maturity date, and the borrower’s experience of working with the kind of project they are tackling with this loan.
An ability of a lender to fund this loan fast will be the major difference between winning & losing the deal, particularly if you are trying to secure the property against competing bids. The quick close with the hard money loan will attract sellers as well as set your offer besides other buyers with the slower and conventional funding.
The private lenders will structure the loan repayment & collateral terms in such a way that it is mutually beneficial to the borrower and lenders. The credit unions and banks are not as flexible and generally take the multipurpose approach to various loan requests. The hard money loan lenders will structure loans based over the percentage off the purchase price or loan-to-cost and loan-to-value (LTV) with the value based on a quick-sale of a collateral property.
If you are turned down for the conventional loan because of the past credit trouble, short sale or foreclosures, you know how much frustrating it is. Hard money lenders can look past the issues providing the loan get repaid and borrower has sufficient equity invested in a property.
Hard Money Loans Can Be Approved & Funded Quickly
The biggest benefit of using the hard money loan is the speed in which the loan approval & loan funding happen. In a lot of cases, approval for hard money loan will take place in one day.
Your hard money loan lender will consider the property, amount of the down payment and equity the borrower can have in a property, borrower’s experience, an exit strategy for a property and ensure that the borrower has cash reserves to make their monthly loan payments. When everything appears reasonable in such areas approval can likely be granted.
The Final Takeaway
The investors who have never used the hard money can be amazed at how fast the hard money loans can be funded when compared to the banks. The hard money loans are funded with 3 to 5 days if required.
Compare this with the bank that take 30+ days to fund. The speedy funding has actually saved many real estate investors that are in escrow just to have the original lender to pull out or not deliver. It is an ideal situation for the hard money loan lender to come in, offer financing quickly & save a deal.