When you need money quickly, traditional loans are often not the best option because getting approval can be difficult. Many people who are looking to start investing in real estate turn to hard money lenders. Understanding hard money loans is important. This guide walks you through a few things you need to know before choosing hard money brokers.
Your Credit Score Isn’t Important
When you apply for a traditional loan, your credit score is considered to be very important. Hard money brokers aren’t as worried about it because you have to put down something as collateral before you can be approved for the loan. Traditional loans often require 7% as a down payment, whereas, you can use the property that you are buying as collateral or property you already own for hard money loans. The amount of loan you possibly qualify for will be dependent on the value of the property that you are using for collateral. The hard money lenders will typically provide you a loan that covers a portion of the overall value of the property.
Hard money loans are considered to be high risk. If you don’t pay your loan on time, the lender will have to sell the property in an effort to get their money back. If they approve a loan for the full value of the property, getting the money back if you default will be slim to none. According to Consumer Finance, for traditional loans ” Loan amount must be $484,350 or less in most counties and may be as high as $726,525 in high-cost counties. ” Hard money loans do not have such a stipulation.
Interest Rates for Hard Money Brokers are Often Hefty
Hard money lenders do not lend money to people out of the kindness of their hearts. The transaction needs to be profitable for them in order for them to make the loan. This means that they have to charge an interest rate for the loan that takes some of the risks out of it for them. Higher interest rates are attached to hard money loans than traditional loans. Since they require less stringent stipulations to be met, they can be easier to get. This often makes the higher interest rates worth paying for many borrowers.
Approval Takes Less Time
Traditional loans can take a long time for approval. Many stipulations must be met and then the lender, typically a bank, takes often more than a month to approve a loan. When you need money to buy a property that is up for auction or simply selling at a great price, you need to be able to get the money quickly. This is where a hard money loan comes into play. You can often get approved for a hard money loan within a very short period of time. This allows you to never have to miss out on great deals.
Your Loan Needs to be Repaid in a Timely Manner
Hard money loans often have the requirement to be repaired in a very timely manner. The loan agreement has stipulations for when the entire debt needs to be repaid. This is often just a few years or less. You don’t have to make a lump payment to pay it off though. Many people who use the loans do pay it off in a large payment when they sell the property. Most hard money loans are used in the house flipping business.
Choosing Hard Money Brokers Isn’t Difficult
Choosing a hard money lender to work with doesn’t have to be difficult. You simply want to work with a lender that has experience with hard money loans. An experienced lender will have the paperwork already created. They will be able to answer specific details when you ask them and get back to you quickly about whether or not you have been approved for the loan.
Before applying for a hard money loan, you need to know exactly how much money you need. Have an attorney look over the application to ensure that you understand the stipulations of the agreement. You need to be sure you know how much the loan will be for, how long you have to pay it back and what the interest rate will be. Once you are approved for the loan, you can buy your property and get started with your project right away.
Consumer Finance – https://www.consumerfinance.gov/owning-a-home/loan-options/conventional-loans/
Down payment for traditional loans – https://www.nerdwallet.com/blog/mortgages/20-percent-mortgage-down-payment-dead/
Definition of hard money loan – https://www.investopedia.com/terms/h/hard_money_loan.asp