What Is a Hard Money Loan and When Is It Used?

If an individual is unable to qualify for a traditional mortgage on a property, he or she may turn to a hard money lender. Hard money loans are secured by a lien placed on the home, and hard money lenders generally don’t require a credit check. Let’s take a look at some other important details about this loan product.

What Is Hard Money?

Hard money is another way to describe a bridge loan or an unconventional real estate loan. It is akin to a title loan in that it is secured by an underlying asset and requires no credit check as a prerequisite for loan approval. Furthermore, lenders tend to charge interest rates that are at or just below a state’s usury rate.

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When Are Hard Money Loans Useful?

Hard money loans are used when an individual needs short-term financing to either start or finish a project. In some cases, hard money lenders may be called upon when a homeowner has exhausted his or her savings. They may also be called upon when an individual doesn’t want to deal with the paperwork or other hassles that may come with applying for a traditional loan.

In many cases, a borrower accepts the money with the intent of flipping the home in a matter of months. Borrowers may also want to get a traditional mortgage on the home and use the money to pay back the hard money lender. The mortgage is generally approved for what the house is worth after it is fixed up.

How Long Does a Borrower Have to Repay the Loan?

Hard money loans may have different terms depending on lender preferences and borrower needs. In some cases, loans are repaid within a few days or weeks. They may also be paid back over a period of several months or several years. Typically, they tend to have terms of between six and 12 months.

How Much Will Lenders Provide?

The amount of money that a lender wishes to provide depends on a variety of factors. These factors may include the potential value of the home after repairs, current market conditions and availability of funds. Depending on the circumstances of a given loan, it is possible for a borrower to receive anywhere from $5,000 to $500,000.

What Goes Into Determining the Interest Rate?

As a general rule, hard money lenders charge higher interest rates because there is no credit check. Therefore, lenders guard against the risk of default by charging more for the right to borrow their money. Interest rates are generally set by taking state law, market factors and the perceived ability of a borrower to complete a project in a timely and profitable way.

Lender preference may also play a role in determining the interest rate charged in addition to any other fees assessed. Typically, the interest on an outstanding balance is compounded daily. Therefore, it may be best for a borrower to pay down the balance as soon as possible if there are no prepayment penalties.

Who Actually Loans the Money?

In many cases, loan proceeds are provided by an individual who is looking to get a better return on available capital. This may be a friend, family member or simply someone who you know in town. In addition to local lenders, national lenders may also be available to fund your upcoming project. In some cases, a lender is actually a group of people who have pooled their money together to fund real estate projects.

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Can Any Project Be Approved?

A lender has the right to provide financing for any project that he or she wants to invest in. This means that you could be able to get a hard money loan to fix up that foreclosed home in your neighborhood or a dilapidated cottage across town. Financing may also be available to rehab or flip a multifamily property or apartment complex.

Getting a hard money loan may make it easier for an individual to finance a real estate project in an affordable manner. Loans can generally be approved and funded within hours or days as opposed to traditional bank loans that may take weeks to approve. As there is no credit check needed, failing to repay a hard money loan may not lower a person’s credit score as much as defaulting on a traditional mortgage.