Are you interested in a hard money mortgage? These asset-based loans could make a big difference to you if you’re hoping to pursue your real estate dreams. There are some things you should know about hard money loans before you sign on the dotted line.
What are Hard Money Loans?
Let’s start with the basics. You may be wondering what exactly is a hard money mortgage. Well, this is an alternative form of funding that’s oftentimes easier to secure than traditional mortgages.
Residential hard money lenders lend money to home buyers not based on their credit scores and credit history. They look at the value of their property. So, oftentimes hard money loans involve a private investor lending money to a buyer who isn’t able to secure a more traditional loan.
You often see hard money loans in cases of foreclosures and house flipping. Chances are you know someone or have at least heard of someone who is involved in home flipping. Just flip through HGTV and you’ll see lots of people who are making it big by buying run-down properties. Then they complete the renovation before selling at a profit.
If that sounds like something you want to do, then hard money mortgages may be in your future. Traditional forms of funding can be good, but you have to qualify for them. The application process for these loans can be tough.
After all, banks and mortgage lenders need to look at your credit score and borrowing history to evaluate if you’re worthy of receiving a home loan.
That’s why hard money loans can be good. The process tends to be quicker with a better rate of acceptance, as long as you have that property value to back you up.
Of course, as with anything in life, there are some factors of hard money loans to think thoroughly about before jumping to any major conclusions.
What You Need to Know Before Getting a Hard Money Mortgage Loan
Before you secure a hard money mortgage, you need to think about your real estate and funding options. According to the U.S. Census Bureau, the median sales price of new homes sold in July 2019 was $312,800; the average sales price was $388,000.
You want to make sure a potential hard money loan would make sense for you financially.
Notable financial expert Dave Ramsey said, “You don’t want to have so much money going toward your mortgage every month that you can’t enjoy life or take care of your other financial responsibilities.”
This concept certainly applies to hard money mortgages. Before you get such a loan, you want to ensure you can pay it back comfortably.
Due to the loan conditions, the interest rates on hard money loans are higher. Interest rates may be more around 8-11 percent depending on the lender. Most borrowers are looking to sell their property at a profit within five years. That way they can pay back the loan without too much interest.
Hard money lending usually has an LTV, or loan to value within 65 to 70 percent of the property’s value. With this low LTV rate, the lender can be assured that the property will sell for at least the amount owed against it in the case of a default. It’s pretty rare to find a hard money lender who will borrow you more than 70 percent.
What Should You do Next?
So, what does this mean for you? Hard money lenders are eager to guarantee that the property will be valuable enough to pay off an existing mortgage in case anything happens. Cross collateral for the hard money loan is one way the private hard money lenders can protect their investments.
You have to remember the increased interest rates while understanding that these higher fees are justified because of the risk factors. Private lenders need to protect their investment, the same way you need to protect your property.
If you have been struggling to secure a mortgage or you want to get into home flipping, hard money mortgages present a great opportunity.
If you are aware of the fees and interest rates associated with this loan hard money loans can help you tremendously. Speaking to a reputable hard money lender is a great place to start.
Sources: (Quote) https://www.brainyquote.com/quotes/dave_ramsey_520304?src=t_mortgage
“Dave Ramsey Quotes.” BrainyQuote, Xplore, https://www.brainyquote.com/quotes/dave_ramsey_520304?src=t_mortgage.
Cornish, Cheryl, et al. “New Residential Sales.” Census.gov, 23 Aug. 2011, https://www.census.gov/construction/nrs/index.html.