A hard money loan requires real estate as collateral. Unlike most other loans, the borrower’s credit history isn’t a deciding factor. What matters most is the value of the property the borrower wants to use for collateral. The borrower must already own the property or plan to buy it with the loan. This type of loan isn’t available from a traditional lender such as a bank, but it must be acquired from a private lender.
Harm Money Loan Facts
A hard money loan is generally short-term, with repayment due within one year. But a lender can opt to extend repayment terms for up to 5 years. A hard money loan is paid differently from a traditional loan. The borrower only pays interest or some principal and the interest until the loan is due. When the loan becomes due, the borrower must make a balloon payment.
The amount of money available depends on the value of the borrower’s property. Acceptable collateral is property the owner already owns or is planning to purchase. Hard money lenders care more about property value than they do about credit ratings. That’s why the hard money loan is attractive to most borrower’s who have bad credit. When traditional lenders say no, hard money lenders are more likely to say yes. At least, if the borrower has good collateral.
Types of Eligible Property
A borrower can use just about any type of property for a hard money loan. A plot of land, a single-family home, or a multi-family home would suffice. Commercial and industrial real estate is allowed as well. But not all hard money lenders accept all types of property. A lender can specialize in one or more types of property, but most choose only one specialty. The borrower should ask upfront which types of real estate does the lender accept.
An important note is that most lenders won’t deal with owner-occupied residences. That means if the borrower is using a home for the loan, then it shouldn’t have any tenants. There are several additional rules and regulations that apply when an occupied residence is used for a hard money loan. Most lenders simply don’t want the extra work. Lenders also are less likely to grant a loan if the borrower already has an existing loan. Being the second lender is a risk most lenders aren’t willing to accept.
When is a Hard Money Loan Appropriate?
A hard money loan is generally recommended as a second option. A borrower with good credit, a steady income, and no history of foreclosure can seek financing from a bank or credit union. The process will take longer, but it’s generally the best option if the borrower has time. But if time is short and traditional financing isn’t an option, then a hard money loan is worth considering.
Hard money loans are commonly used when:
1. The borrower wants to buy a property, renovate it, and then sell it.
2. The borrower wants to buy an empty plot of land.
3. The borrower has bad credit or a history of foreclosures.
4. The borrower is a real estate investor who must act fast to acquire a property.
Hard money lenders accept a lot of risk. Because of the extra risk, interest for a hard money loan is generally more than for a traditional loan. The borrower must also present a plan showing how they plan to repay the loan.
Anyone interested in a hard money loan can search online for local lenders. Real estate agents, mortgage brokers, and bankers are also a source for finding hard money lenders.