What is a hard money loan?

Posted by milton ferrara on March 16th, 2018

Many real estate loans easily comply with banks’ underwriting guidelines. A bank’s loan process is rarely considered to be fast or easy, and you may have to provide your bank lending representative with a huge stack of documentation to prove that you meet the guidelines for the loan. There are many instances, however, when bank or institutional financing is not appropriate for your needs. For example, you may need to close much faster than what is possible with bank financing. Perhaps there are specific circumstances about your loan request that prevent loan approval. You could simply walk away from the transaction and pursue other interests. Another option is to use hard money to finance your real estate project.

How Hard Money Lenders Review Your Loan Request

Before you formally apply for a hard money loan, you need to know what the requirements are. After all, you may not want to waste time pursuing financing that you could not potentially obtain. Hard money underwriting guidelines are typically much easier to meet than bank guidelines. You can consider bank guidelines was being a small box, and loan requests must meet all criteria in order to fit within that box. Hard money is a feasible option for many loan requests that fall outside of that box. One reason for this is because most hard money lenders do not review your personal documentation as part of the decision-making process. This eliminates factors like your credit scores or debt-to-income ratio from affecting your loan approval. Hard money lenders usually only review property-specific details. The most important factor that many hard money lenders look at is the value of the subject property.

What You Need to Know About Hard Money Loans

Now that you know more about what hard money lenders look for when determining your loan approval status, you may be wondering who hard money lenders are and what type of loan terms you can expect. Hard money lenders are private lenders. This could include private companies or even wealthy private investors. Hard money lenders use their own funds, so they have complete control over which loan requests they approve. According to DelanceyStreet, this gives them flexibility that banks do not have. As you might imagine, the loan requests that hard money lenders look at may be riskier than the loan requests that banks look at. With this in mind, it is reasonable to expect loan fees and interest rates on hard money loans to be higher than bank loans. Other important differences in loan terms are a term length that is usually less than 18 months and a balloon payment required at the end of that time period.

What to Expect From the Hard Money Loan Process

Applying for a bank loan can be a time-consuming hassle. Banks seemingly ask for a copious amount of documentation, and they may then proceed to ask for many additional follow-up items before they can approve your loan request. Altogether, the loan process with a bank may easily take two to four months or longer in some cases. Hard money lenders also require documentation before they can grant loan approval. However, less documentation is usually required. In addition, hard money lenders often can close and fund a loan request within a couple of weeks.

Hard money loans can be used for both residential and commercial projects. Because of the shorter term length, they are usually used for renovation and flipping projects. However, they can also be used for other purposes. Before you take out a hard money loan, you should create an exit strategy for dealing with the balloon payment required at the end of the term. Hard money loans offer true benefits to savvy real estate investors who are interested in pursuing profitable projects that do not conform to bank rules. Now that you are aware of what hard money loans are, you can more strategically use them to fund your real estate projects in the future.

 

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milton ferrara

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milton ferrara
Joined: March 16th, 2018
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