When you think about loans, you probably either think about big banks that have capital to spare or shady back-alley loan sharks that are almost certainly going to scam you. Hard money loans fall outside of both of these stereotypes. More importantly, they offer real estate investors a great option for funding property. Let’s review how hard money loans work, why borrowers use them, and their common rates and terms.
What is a hard money loan?
Put simply, a hard money loan is a short-term loan that a borrower typically secures with real estate. Private investors fund these types of loans, rather than more conventional lenders such as banks or credit unions. Typically, the term of a hard money loan is about 12 months. However, extensions are available for longer terms ranging from two to five years.
To secure the loan, borrowers don’t need to fret over their credit scores like they do with more traditional lenders. Lenders decide to grant hard money loans based on the value of the subject property, or the real estate that the borrower is looking to buy. They tend to close hard money loans quickly and it’s not unusual for the application process to only take one or two days.
Who uses hard money loans?
Although hard money loans typically support real estate transactions, they don’t typically fund a homeowner’s dream house. Instead, these loans are for real estate investment properties that need a bit of TLC to bring them up to snuff. This care could be in the property’s landscaping, which can increase a property’s resale value by 14%, or on the interior rooms and features. Hard money loans are an especially good option for people who flip homes to resell them or renovate a property to rent it.
Improvements for these types of properties are often costly. For instance, if you want to invest in an old home that is among the estimated one in 15 US homes that have radon levels at or above the EPA action level, you’ll need to pay for radon mitigation. These systems can be expensive, but a hard money loan can help you finance it along with any other necessary improvements.
These loans are also suitable for those who want to purchase commercial property. Say you want to turn a space into an ice cream shop. With the average American eating ice cream 28.5 times in just one year, this will certainly be a profitable enterprise. However, ice cream sales depend on the season and you might not see these profits right away if you need to delay renovation to wait for the lender to approve the loan. Rather than waste valuable time, you can turn to a hard money loan that will be reviewed quickly and easily.
What are the common rates of a hard money loan?
You already know that the length of a hard money loan is much shorter than a typical loan. This shorter length will also mean a higher interest. The exact interest rate will depend on factors such as location and the amount of risk the lender is taking. Borrowers may also face origination points, and an up-front percentage fee for access to the funding. They may also face additional lender fees.
The other important rate of a hard money loan is the loan-to-value (LTV) ratio. Most homebuyers get loans with an 80% LTV, meaning that the lender loans about 80% of the home’s value. The homebuyers then need to put 20% down on the home to cover the rest. Hard money lenders are taking more of a risk than traditional lenders because they don’t require credit checks. As such, hard money LTV ratios are usually between 60% and 70%. However, borrowers don’t have to put any money down. That’s because that percentage is based on the property’s value after it’s been repaired.
While the terms may be a bit different from what you’re used to, hard money loans can be a great option for many people. If you’ve been considering a renovation project, jump into it today with this useful loan.
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Really helpful article. I liked the point you made that it has to work for you to be effective. So true! Thanks for sharing.
Wonderful blog!