Hard money loans are the ones you borrow from individuals or investors by using your property as collateral. Such loans usually don’t involve traditional mortgage lenders like banks. The hard money option becomes a top choice for borrowers who are not eligible to apply for a regular loan from traditional lenders or if they are in an urgent need of money.
Traditional Lending
If you approach a bank for a loan, they will first check your credit score and your income to determine if you will be able to repay the loan. If you have a history of successfully closing previous loans, your chances of getting the new loan are high. However, not all borrowers have all the credentials that a traditional bank demands to approve a loan. Moreover, the bank’s approval process is long, and in the end, it may even get rejected for unprecedented reasons.
On average, traditional loans take around 30-35 days to get processed, but hard money loans can be processed in about a week’s time. If you reside in New Jersey, you can read more here to gather a general idea about how quickly a hard money loan can be approved in your region. You can also seek the help of professionals in case you have trouble with the application process or other loan details.
How Do Hard Money Loans Differ From Regular Loans?
If you are not ready to go through the long and arduous loan process at a bank, you can approach hard money lenders. They lend based on the collateral property, so naturally, they are not too bothered about your ability to repay the loan. If things go south and you default on the hard money loan, the lenders plan to confiscate the collateral property from you and make money by selling it. So, in order to receive a hard money loan, the value of your collateral property is much more important than your current and past financial health.
Interest Rates and Duration of Hard Money Loans
The hard money loans are generally short-term loans with a duration ranging from one to five years. Considering that they are easier to get, they are associated with higher interest rates as compared to traditional bank loans.
When Should You Consider Them?
Hard money loans come in handy when you are in need of sudden liquidity infusion and are reasonably confident that you can repay it soon. For example, it is an attractive option for a fix-and-flip investors who usually buy a property and own them just long enough to turn a profit on increased value and sell them. They usually flip it in under a year, so they can make a profit even after repaying a hard money loan at a high interest rate.
Hard money loans can also be a viable option when a real estate investor is having a cash crunch, but needs to make a move on a potentially lucrative property deal quickly. It can also be used to power your business out of its impending doom.
LTV Ratios of Hard Money Loans
Loan-to-value (LTV) ratio is the amount of the loan divided by the value of the property that is being submitted as collateral. Given the higher risks associated with this type of loan, the lenders usually offer an LTV ratio of 65-75% while the traditional lenders can go much higher. If you are an experienced fix-and-flip investor and hold a proven track record with your hard money lender, you could get a higher LTV ratio than regular customers.
The Flexibility of Hard Money Loans
The hard money lenders don’t employ a standard underwriting process as they prefer to evaluate each loan application on a case-by-case basis. Such an approach allows the borrower to negotiate with the lender as far as the repayment schedule is concerned.
Disadvantages of Hard Money Loan
Hard money loans are easy to get if you have a high-value property and the processing time, as mentioned before, is much quicker than traditional lending. However, these advantages do come with potential downsides. With a high interest rate of 10-15% (sometimes even higher), lending hard money for a long-term investment doesn’t make sense at all. Also, considering that the lenders offer a very low LTV ratio, if you fail to repay the loan and end up in a foreclosure situation, the loss associated with letting go of your property will be very huge.
Hard money lenders and investors usually operate in their localities, unlike banks that have branches all over the world. Approaching local real estate agents and investors would be a nice place to start in order to gather some contacts. Get in touch with different lenders, discuss your financial requirements, and build up a rapport with them beforehand. This way, you will be able to get your hard money loan approved successfully shall the need arise.