Housing hunting is fun, but also stressful. Many people see buying a home as a significant milestone of adulthood. But what happens if your credit isn’t right? While you can attempt to get a traditional bank loan with a co-signer, there’s also another option. Hard money lenders provide the funds for purchasing a property to people with damaged credit. A hard money loan offers similar pros and cons to a traditional loan, but it might be easier to get.
Who Are Hard Money Lenders?
No, they aren’t creepy characters in a trench coat making backdoor deals. Hard money lenders are privately funded lenders. They are not affiliated with banks, credit unions, or mortgage lenders. People with a history of poor credit, bankruptcies, or foreclosures, might consider a hard money loan. The hard money loan amount is based on the property value. If the borrower is unable to repay the loan and defaults, the hard money lender takes possession of the house and resells it.
What Terms Are Included in a Hard Money Loan?
Years ago, a hard money loan lasted typically for a short term of one to five years, but this is no longer the case. Now hard money loans come with longer terms, which makes them more attractive to home buyers. However, a lender generally wants a return on their investment. Therefore, a borrower needs to have some of the money necessary to purchase the property as a lender won’t lend out more than 70 percent of the property’s current value. This practice ensures the lender can sell the property if you default and collect their money plus extra.
The lender’s interest rates could be higher than traditional, Federal Housing Administration (FHA), or Veteran Affairs (VA) housing loans. Hard money lenders might charge 10-15 percent interest rates. Points ranging from two to five are added to the loan amount to generate an origination fee. Two points are two percent of a loan amount of $150,000 equaling a $3,000 origination fee.
According to Forbes, 32 percent of mortgage loan applicants with a credit score of less than 700 were denied. Sure 68 percent of applicants were approved, but what about the others? “Just because you have a low credit score doesn’t mean you can’t purchase a home. There are a lot of options out there for consumers…,” says Randy Hopper, senior vice president of mortgage lending for Navy Federal Credit Union. Property buyers looking to invest in a flip or a home should consider applying for a hard money loan because it could be the answer to their dilemma.
The Benefits of Using a Hard Money Loan
The home buying process might be lengthy, depending on how long it takes to find a property. But the way you purchase the house could drag if you attempt to apply for a traditional home loan. Factors like the amount you need, credit score, and negative items on your credit history might reduce the chances of approval. Therefore considering a hard money loan might be a valuable option because of the benefits associated with them.
Faster Application Process
Since a hard money lender isn’t focusing on your credit score, the application process goes by quicker. A hard money loan is ideal for someone who doesn’t want to wait for the bank to run a credit check, look into employment history, or to review bank statements. If a borrower has cash available, approval can usually occur within a week as opposed to 30 – 45 days for a regular mortgage loan.
Hard money loans come with a flexibility that other investments don’t offer. Because hard money loans don’t use regular underwriting and examine the numbers for each deal, the length of the loan and the interest rates can get negotiated.
Short Term Deals
Hard money loans are best for short term borrowers. The higher interest rates don’t make them suitable for a person who wants to live in the property long term. A person who intends to buy and flip a home could make out well with a hard money loan, especially if the purchase, repairs, and selling happen fast.
If you’re looking for an easier and faster way to finance your property buying needs, then a hard money loan might be right for you. To learn more about hard money loans, please contact a hard money lender to discuss your interest.