Are you looking for extra money to help you navigate hard financial times or fund your next business project? Taking out a loan could be an excellent idea. However, with so many loan products in the market, which one is right for you?
Hard money loans is an excellent financing option if you need urgent cash or you don’t meet the qualifying requirements for other lenders. According to recent research by Bankrate, over 22% of Americans were denied credit in 2020 due to low credit scores. If you are part of this group, a hard money loan is right for you.
So, what are hard money loans, and how can you get them? Read this article to understand more about these types of loans.
What Are Hard Money Loans?
A hard money loan is a type of financing where a real estate property secures the money instead of an individual’s borrowing power and credit score. Hard money loans are chiefly used in real estate projects.
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Hard money lenders are individuals and organizations such as PB Financial Group that offer loans to borrowers who have been turned away by banks and other financial institutions. These loan types often last between one and three years.
For example, if you are looking to sell your house and buy a new property, you could take a hard money loan and buy the new property before the funds for your old house clear up. This way, you are allowed to use your old house as collateral.
Hard money loans take short processing time; thus, it’s also an excellent option for property owners at risk of foreclosure. Most people also opt for hard money loans when flipping houses or purchasing an investment property. The most significant difference between other traditional loans and hard money loans is that your home is the collateral.
This means that even people with lower credit scores can secure these types of loans. That’s because hard money lenders don’t consider one’s financial history as a qualifying factor.
How Do Hard Money Loans Work?
So how does a hard money loan work? Although lenders don’t look at your finances and credit score, they still consider other essential factors. Some of these factors include your debt-to-income ratio, your home equity, and the loan-to-value ratio.
Once your loan is approved, the money is quickly issued into your account. However, there is a catch for the faster turnaround, and it’s a high-interest rate. A hard money loan is more expensive than other loan types because the lender is taking a higher risk by lending you; thus, the interest rates are high.
How Are Hard Money Loans Interest Rates Set?
Hard money loan rates are quite high. Understanding the loan process will help you better understand how these interest rates are set.
The lender starts by reviewing all your financial background information to decide if you can repay the loan. If you cannot pay for the loan, the lender will be at a loss; thus, lending you money will be a huge risk.
However, your home will be listed as the collateral. This means that they can easily resell the house if you are not able to pay the loan. The interest rate may range from 2-10%, significantly higher than traditional loan interest rates.
What Is the Risk of Hard Money Loans?
Most people consider a hard money loan as the last resort loan. Despite the many benefits, such as an easier approval process and faster disbursement of funds, hard money loans are quite risky. Ensure you are careful even with the best hard money loans in the market.
On top of the high-interest rates, other upfront fees are associated with hard money loans. These charges include closing cost and origination cost, which may require up to a 30% down payment.
If you can qualify for other loan types, it’s better to exhaust all your options before choosing a hard money loan. This will save you thousands of dollars in additional costs and loan rates in the long run.
When Do You Need a Hard Money Loan?
Most people often settle for a hard money loan after exhausting all other loan options. If you can’t get financing and have a property that can stand as collateral, it’s better to settle for a hard money loan.
Below are some common reasons why people prefer hard money loans:
1. When Flipping a House
If you are a real estate investor looking to purchase a property at a lower cost, fix it then sell high, this type of loan is ideal for you. Fix-and-flip projects are often quick; thus, a hard money loan can be the best financing option for you.
2. When Buying Investment Property
Most people looking to buy investment property but can’t qualify for other traditional types of financing can opt for hard money loans. It’s also an excellent option for people who can’t get the right amount of money they need for their investments from traditional lenders.
3. When Buying Commercial Property
Business owners can utilize hard money loans to purchase a commercial property for their business if they can’t get the finances from a traditional lender. If you are an investor looking to buy a property that doesn’t qualify for conventional loans or you can’t find a lender who will give you the money you need, a hard money loan can be an excellent option for you.
Now You Know All About Hard Money Loans
Hard money loans are the best option for people who don’t want to go through other lending options. They are short-term loans intended for real estate investors and home flippers who don’t qualify for different types of traditional loans.
While these loans are easier to secure, they have higher interest rates and can be quite risky, especially if it’s your first project. Ensure you conduct research about these types of loans and their risks before signing the dotted lines at the bottom of the contract.
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