A hard money loan uses real estate as collateral, and it’s an ideal solution for investors who need funds fast or can’t get a more traditional loan. However, these loans can also have higher rates and more risks. Here’s some more information about how hard money loans work, the potential risks, and what lenders usually look for when making a hard money loan.
How Hard Money Loans Work
The terms of a hard money loan are mostly based on the value of the collateral you use, not your credit rating. These loans are ideal for investors who need quick access to funds. Businesses and individuals often offer them instead of traditional banks, and people usually use them as short-term bridge loans. A hard money loan often involves a mortgage refinance or cash-out refinance. The borrower uses the money to pay off the existing mortgage, and they get additional cash for whatever they need. Then, they make payments on a higher principal amount.
People use hard money loans to make renovations on existing homes and businesses or buy and resell properties. Most hard money loans last for one to three years, and they can provide temporary funding while you wait for an investment to pay off or apply for a more traditional soft money loan.
The application process is usually much easier than for other types of loans, and many people can secure financing in less than a week. This makes a hard money loan ideal for people who don’t have great credit or whose tax returns don’t reflect a recent increase in their income. A faster financing process also makes competing with cash buyers easier.
The Risks of a Hard Money Loan
Like any loan that uses property as collateral, foreclosure is a risk with hard money loans. You should look at the terms of your loan carefully and make sure that you can afford the payments. Some hard money lenders offer low rates that increase after an initial time period, and you should be prepared to make larger payments or refinance with a soft money loan after the introductory rate expires. People sometimes call these higher payments balloon payments.
If you’re flipping a house or making another investment, you may need to extend your loan if making your money back takes longer than expected. Before you agree to a hard money loan, find out what will happen if you need a longer term. If you can’t pay the money back or refinance, you could lose the property. Most hard money loans require full repayment within a few years, while most conventional mortgages last for at least 15 years. Hard money lenders often foreclose faster than traditional banks, so understanding the potential consequences of a missed payment is important.
Before you sign a loan agreement, make sure you understand the terms, and look carefully for changes. After the underwriting process is complete, the terms a lender offers could be different. You should also watch out for identity thieves and other scammers offering loans without collateral or extremely low rates that seem too good to be true. These websites often have unclear terms, spelling and grammatical errors, and application fees. While some fees are usually due after you sign a loan, you won’t need to pay just to apply.
A secure website will have a URL starting with https:// and a symbol that looks like a lock. Even when you visit the site of a lender you know well, it’s a good idea to double-check and make sure the address is correct. Some scammers make copies of sites from reputable companies.
By choosing a local lender like Titan Funding, you can visit face-to-face, do more thorough research, increase your confidence, and make sure you get the loan that’s best for your needs. You’ll also be working with a reputable organization, not an individual who could decide not to lend you the money you need at the last minute.
What Lenders Look For
Instead of focusing on your credit score, a hard money lender looks at the value of the property and the possible earnings of investments. A loan-to-value (LTV) ratio of less than 60% is best. That means most hard money loans are for less than 60% of the value of a property. People and companies who buy new homes or businesses with hard money loans often need to pay for the other 40% of any properties they buy in cash.
An appraisal of the property is usually required. If you’re making renovations, you’ll usually need builder’s risk insurance to protect the property from natural disasters, vandalism, theft, and other hazards. You can show the lender that you’re committed to your investment by making a larger down payment and demonstrating a record of successful investments that are similar.
For example, getting a loan to flip a house is easier for people who have profited from previous flips and are familiar with the real estate industry. Hard money lenders also consider the potential profitability of the property. It may be more difficult to get a loan for a place that needs extensive repairs than for a property that’s ready for you to rent and start getting returns on your investment.
Showing that you have enough in savings to make monthly payments for at least six months can help you qualify as well. You can also submit tax returns or pay stubs to demonstrate that you have a regular income. Before becoming professional home flippers or other types of real estate investors, many people work in the industry part-time while keeping a full-time job in a different field.
Titan Funding can approve hard money loans in as little as 48 hours. We offer loans from $100,000 to $5 million, and our stable interest rates let you predict exactly what you’ll owe in the future. If needed, we can convert your hard money loan into permanent financing with a term of up to 30 years. Customized contracts are available.