What’s the first thing that comes to your mind when you hear ‘hard money loan’? Did it make you apprehensive, suspicious or fearful? Would you be willing to apply for it if you are in need? Admittedly, the term earned a bad reputation because of some unscrupulous people who used it to take advantage of borrowers. However, it is not really bad and certainly not risky to apply for this type of loan if one needs money. If you are in need of money for whatever reason, you may apply for a hard money loan. However, it is better if will you understand what this type of loan really is before you apply for one.
What You Need To Know About Hard Money Loan
A hard money loan is actually just a short-term loan which requires real estate collateral. Private investors are the usual lenders of these types of loans. They are not usually given by traditional commercial lending institutions like banks and credit unions. The term of payments usually runs to at least 12 months. But it is not unusual for a hard money loan to be extended up to 5 years. The borrower is required to pay his installment on a monthly basis. He can choose to pay the interest only, or interest with some portions of the principal if the agreement is balloon term payment, meaning a major amount of the principal is to be paid at the term’s end.
Since hard money loan is secured by real estate, the amount of loan will be dependent on the value of the real estate to be mortgaged. It is not necessary that the property is already owned by the borrower. He can use a property that he is in the process of acquiring as collateral. Lenders of this type of loan are more interested in the value of the property more than the credit rating of the borrower. People who got disapproved by commercial banks and credit unions are the ones who usually resort to applying for hard money loan. As long as their equity in the property is sufficient enough, they could apply for a loan.
One can obtain a hard money loan faster than other types of loans, because it is not tied up with the credit rating of the borrower, and the requirements are flexible. However, there is a trade-off. It is more expensive than other loans. The usual interest rates are from 7 percent to 12 percent, plus additional charges of 1 percent to 10 percent once the loan amount is released. But this does not discourage investors from applying because the term of payment is only short, with an average of three years.
Who Usually Applies For A Hard Money Loan?
There are basically two types of borrowers who apply for hard money loans. They are:
1) Those who are rejected by commercial banks or credit unions
Borrowers who have low credit ratings, those who suffered from foreclosures of business, and those who have credit issues, and other similar financial shortcomings, are usually frowned upon by banks and credit unions. Banks also look at the current income of the borrower if it will justify the loan approval. If he has a healthy income, the bank might approve the loan. If not, the loan application will be rejected. Hard money lenders are not very particular about these issues. As long as the borrower owns sufficient equity on the property being collateralized, they will approve the loan.
2) Investors in real estate
Real estate investors apply for hard money loans because they can be quickly funded. Applying for a hard money loan and getting the loan proceeds usually take only about a couple of days compared to traditional bank loans which could take around 30 to 45 days. There are cases wherein hard money loans were approved within the day. Obtaining money from the lender at this fast clip is very advantageous to investors in real estate. For instance, if there are many bidders for a certain piece of prime property, a bidder can readily produce the money to pay for the land coming from the proceeds of a hard money loan.
Even If It Is Flexible, There Are Still Some Requirements
Although lenders of hard money loans are not as picky about their requirements, they would still require the borrower to prove that they are worthy risks. First, the borrower should be able to prove that he has the capital to pay for the interest on his loan. Second, he should be able to show that he has a logical plan by which he intends to pay off his loan. And third, he should be able to show that he has enough equity of the property that he is offering as his collateral. For as long as he can show his capability of doing these three things, the lender is willing to overlook all things that may jeopardize his loan application.