How Hard Money Loans Work 

Shaun H. Ruff

A hard money loan is an alternative to a bank loan. It is used to buy property that is an investment. The loans are obtaining quicker than other traditional mortgages given by a financial institution. People typically obtain the hard money loan because it is a last resort for them. However, they are not always the last resort. They are often used because they more flexible than traditional mortgages.

Terms of Hard Money Loans are Different than a Traditional Loan

Investors who use hard money loans can typically pre-qualification quickly. Fast funding is also an option. Hard money lenders require few borrower qualifications than traditional bank lenders. However, the terms of the loan can be little different and more expensive than traditional bank loans.

For instance, hard money loans general has lender fees, rates and shorter terms. The hard money loan rates range from 7 to 12 percent with interest-only payments. A bank loan interest may range from 3.5 to 6.5 percent. Lender fees include a percentage point ranging from one to 10 percent. Bank lender fees may range from one percent or lower. The hard money loan terms vary from one to three years.

Loan Amount and Down Payment
Conventional mortgage is issued by a bank and set loan amounts equal a percentage of the purchase price of the house. This means conventional mortgages will equal about 80 to 96.5 percent. Of the purchase price of the house. Thus, the investor can expect to put down a 20 percent or more down payment of the purchase price.
A hard money loan is used by a private money loan lender. The lender primarily issues the loan based on the loan-to-value (LTV) ratio of the house. This will occur only if the property is in good condition. They may also may also issue the loan based of the ARV which is the after-repair value ratio. The lender will issue a loan for up to 90 percent of the closing price of the property.

The typically time a conventional property mortgage loan is approved is anywhere between 30 to 45 days. It takes half that time to obtain a hard money loan. In fact, a person can pre-qualify for a hard money loan within three minutes depending on the documents needed. The borrow is responsible for the traditional terms of a mortgage including appraisal fees, application fees and closing costs.

Minimum Qualifications for a Hard Money Loans

An investor wants a hard money loan should meet some of the qualifications such as a credit score that is at least higher than 550. They should have at least three months of bank states. Detailed experience of working with distressed properties, a purchase price and property location.

Hard Money Loans are Short-Term Loans for Investors

Hard money loans are interest-only, short-term loans used by investors. They use the money to rehab and distressed properties. The loans can have higher rates but can be funded within 15 days. The loans are repaid within a short amount of time than a traditional loan.

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