What is a Hard Money Loan?
Many think of a hard money loan as a last resort when it comes to taking care of financial emergencies. The term “hard money” refers to the fact that the value of property is used as collateral rather than creditworthiness. Because this is the only form of collateral on the table in such a transaction, these loans generally have much lower loan-to-value ratios compared to credit-based loans.
Another reason that this ratio is reduced is because hard money loans usually carry much higher interest rates even compared to subprime traditional loans. Because banks don’t finance hard money loans, a typical lender offering such a service may simply be a private individual who understands financial difficulties and sees potential in this risky loan.
Why Use Hard Money?
Expensive though it may be, there are situations in which hard money has a place to help secure your financial future, especially if you are not able to obtain traditional bank lending.
Hard money lenders focus more on collateral and less on what your finances are, so they won’t do the normal research that a bank would need to do. These lenders don’t want to have to take your property, but they also do not need to comb through your loan application with the utmost scrutiny.
Because there is much less involved in the transaction, hard money loan agreements will typically have much more leeway than a bank contract. There are no underwriters with these lenders; each deal requires individual evaluation. This means you will likely have a little room to adjust the repayment schedule if necessary. After all, you’ll be talking to a real human rather than a company.
Collateral is the most important part in a successful hard money loan. If you are looking to buy an investment property, you’ll probably get as much money as that property is appraised for. If you have a foreclosure you’re trying to avoid, then that property’s value is the important factor, not the foreclosure itself.
The maximum loan-to-value ratio that you are likely to see with a hard money lender is between 50 to 70 percent, which means you need valuable assets in order to qualify for the loan. This gives the lender the necessary comfort that he can sell off your property should you fail to repay your loan.
When Should You Use Hard Money?
The best time to use a hard money loan is in the short term. One great example would be for fix-and-flip investors who buy a property and quickly resell it instead of living there. Sure, you may wish to live in the house after all, but you’ll want to refinance that into a better loan if it becomes a long-term deal.
As we have previously mentioned, the main thing hard money lenders care about is how much equity you’ve invested in your collateral. Your credit rating is much less important. If you have a foreclosure or similar blemish, it is often overlooked if you can pay back the loan. The lender will also take into consideration what you want to do with the property, so be sure to have a reasonable plan to present to your lender.
Borrowing hard money requires getting in touch with the right investors. Contact some local real estate agents and relevant groups to find some names of those who deal in loans based on collateral. Reach out to a few and be sure to develop a strong relationship with them to expedite any future loans.