A hard money loan refers to one type of loan. However, what sets it apart from other types of loans is that it is secured by real estate. In addition, they are considered short-term or last resort bridging loans. Basically, they are used in different real estate transactions. Lenders are companies or individuals, not banks. Keep reading to know more.

Key takeaways

Below are some of the salient features of these loans.

  • Mainly, they are used for real estate transactions. And this money comes from a company or individual rather than a bank.

  • Generally, this type of loan is granted for a short period of time. The purpose is to collect money quickly at a lower LTV ration and higher cost.

  • Since these loans are not traditionally executed, the financing time that is reduced is usually quite fast.

  • It is interesting to note that the terms of these loans are negotiated between the borrower and the lender. Also, these loans use real estate as collateral.

  • Although repayment can result in default, they still leave a large amount of profit for the lender.

How does a cash loan work?

Hard money loan terms are generally based on the value of the real estate property, not the creditworthiness of the borrower. Since conventional lenders like banks are not the lenders, private lenders or companies are more interested in this business.

Also, these loans can be a good option for homeowners who have plans to renovate a property and sell it again. Here you may be thinking that the cost of this type of loan is quite high. But the good news is that the extra cost offset by the loan will pay off fairly quickly. In most cases, the loan is for a period of 1 to 3 years. Apart from this, they also offer many advantages.

Apart from this, this type of loan is also considered a great investment. You can find many people who have done this business and are happy with the practice.

Special Considerations

Typically, unlike bank financing or government financing programs, the cost of these loans is significantly higher for a typical buyer. However, this cost reflects the higher risk assumed by the loan grantor. But the best part is that the additional cost is well worth it, as the money is readily available. The approval process is less stringent and the payment schedule is also quite flexible.

In addition, these loans can be an excellent option to deal with changing situations. For example, if you need money quickly for short-term financing but have a low credit score, you can give it a try. Since the amount is issued fairly quickly, you can use the funds to avoid foreclosure, for example.

Pros and cons

Now, let’s take a look at some of the pros and cons of hard money loans.

Pros

First, the approval process is significantly faster than a conventional mortgage or loan process. What happens is that private lenders are interested in this type of business, since they can make decisions quickly without having to carry out many controls. In other words, they won’t check your credit history. These are the steps that slow down the process and make the borrower wait for weeks.

Typically, these investors only care about redemptions. In addition, they have the opportunity to resell the property in case the borrower defaults and becomes delinquent.

Another advantage is that the lenders do not apply the conventional underwriting process. Instead, they evaluate all cases one by one. Applicants can often sit down with the lender and discuss the payment schedule based on their circumstances. Apart from this, borrowers can take advantage of many opportunities during the time that they have. So this is another great advantage that you can enjoy if you go for this option.

Cons

Since real estate is used as collateral against default, these loans feature lower LTV rations than regular loans. This ration is between 50 and 70% unlike the ration of ordinary loans, which is 80%. However, if you are an experienced flipper, it can be even higher.

Apart from this, the interest rates on these loans are also higher. For subprime loans, the interest rate can be even higher. In 2019, for example, the rates on hard money loans were between 7.5 and 15% depending on the period for which the loan is granted. In contrast, the prime rate was only 5.25% in the same period.

Another downside is that these lenders may not offer loans against owner-occupied property due to compliance rules and regulatory oversight.

I hope you now understand what hard money loans are and the pros and cons associated with them. For more information, you can consult your mortgage broker.

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