You may have heard about hard money loans in passing several times over the years, but you may have never had a reason to learn more about hard money loans until now. Perhaps another lender or a mortgage broker has recommended hard money lending to you. You may have read about hard money loans as a creative lending solution in a book or in an article.
Your experience with real estate lending up to this point may have consisted of mortgages provided by major or local banks, credit unions and other similar types of financial institutions. Hard money loans are unlike these loans in most ways. In fact, one of the only similarities between traditional bank loans and hard money loans is that they are both secured by real estate. Learning more about what hard money loans are and how they are commonly used can help you to decide if this is the right financial plan to address your current needs.
How Are Hard Money Loans Different?
Hard money loans are not available through a bank or a credit union. These loans are offered by a private investor or by a private lending company. These lenders and investors do not have the strict underwriting guidelines that you may be accustomed to with traditional bank loans. This flexibility also allows hard money lenders to close and fund loans faster than what you may be accustomed to with traditional bank loans.
Some hard money lenders offer loans on both residential and commercial properties, but others only lend on one specific property type. Each hard money lender may also have its own minimum and maximum loan amounts as well as its own lending guidelines. This can make it more challenging in some cases to find a lender that is willing to look at your specific loan scenario, but remember that hard money lenders generally can offer loans on projects that traditional bank loans cannot.
Because hard money lenders have flexible guidelines and are able to lend on projects that do not fall into a traditional bank’s box, the loan terms are typically substantially different in comparison to bank loans. You can expect the interest rate and loan fees to be higher. In many cases, the loan payment is an interest-only payment. The loan-to-value is also substantially lower than with a traditional bank loan. The loan term is usually 12 months, but there is some variation to this. Because the term is so short, many hard money loans only have interest payments. This means that the loans typically have a balloon payment required when the term expires. This balloon payment has a specific due date, so any applicants who take out a hard money loan need to be aware of the due date and need to take action to prepare for this due date. Some of the actions that are commonly taken include applying for permanent financing through a bank or selling the property.
When to Apply for Hard Money Loans?
There are many reasons why you may think about applying for a hard money loan. One reason is when you have an existing loan with a balloon payment due soon. You may not have time to sell the property or to walk through a refinance process with a traditional loan. A hard money loan is a fast way to address the timing dilemma that you may be in. Another reason to apply for a hard money loan is when the property needs to be renovated or rehabilitated. In the residential real estate world, hard money loans are often used for flipping projects. The loan money is used to purchase the property, and some hard money lenders provide renovation funds as well.
Commercial renovations also commonly use hard money as a source of funding. Keep in mind that traditional commercial investment loans generally require the property to produce a specific level of cash flow. When occupancy is low, property management has been running the property with high expenses or rental rates have been kept below-market, the property may not qualify for a traditional commercial loan. Hard money loans can be used to reposition these properties so that they qualify for permanent financing.
As you can see, hard money loans are used for different purposes than commercial bank loans are usually used for. They serve an important purpose for many real estate owners and investors. Because hard money loans are offered by private investors and private lending companies, the types of projects that each will review and lend on varying. In addition, their loan terms can also vary. A smart idea is to speak with a few reputable hard money lenders about your upcoming project. Send a loan proposal to any lenders who express interest in your project. It can take longer to shop around for a hard money loan, but the effort will be rewarded when you set up the right loan for your needs.