A Hard Money Loan or private money loan is simply a short-term loan secured by real estate. It is given using the property as a collateral and are funded by private investors (or a fund of investors) as opposed to conventional lenders such as banks or credit unions.
This loan is intended for short-term investors. The terms are usually around 12 months, but the loan term can be extended to longer terms of 2-5 years. The loan requires monthly payments of only interest or interest and some principal with a balloon payment at the end of the term.
When banks are not an option or the loan is needed in a short period of time, you can source financing through hard money loan.
A hard money loan, usually taken out for a short time, is a way to raise money quickly, but at a higher cost and lower Loan-To-Value (LTV) ratio. The ideal ratio is 80% or less. And because hard money loans are not traditionally executed, the funding time frame is reduced immensely. Repayment can lead to default and still result in a profitable transaction for the lender.
Hard Money Loan is ideal for situations such as:
- Finance Fix and Flips.
- Land Loans.
- Construction Loans.
- When the Buyer has credit issues.
- When a real estate investor needs to act quickly.
This type of loan is a short-term with higher interest rate, quick to acquire but also quick to be repaid. Nevertheless, getting this type of loan is a good fit for investors who need to get funding for a quick property investment.
Pros:
- Can be acquired more quickly; you don’t need to have good credit standing to qualify because the loan is based on the property value.
- More Flexible because every lender has their own set of criteria.
- Provide tremendous leverage for Fix and Flips Investors to maintain liquidity without putting their own money at risk.
- Useful as a bridge loan to fund investment while securing longer term Financing.
Cons:
- It offer higher interest rate due to more risk to the lender. It usually carry an interest rate of 4-10% higher than Traditional loans.
- Higher risk on both lender and borrower, due to loan higher interest and short-term that can lead to high financial burdens if not entered wisely.
- Must be paid back quickly in term specified.
- If you can’t repay the loan, you walk away with “nothing.”
Yes, typically you walk away with nothing if you fail to pay back the loan. Lenders are quick to foreclose. Since the entire property was used as collateral, any portion of the loan amount that was paid back is forfeited. For example, if a business owner paid back $100,000 of a $115,000 loan, the entire $100,000 paid is deemed lost.
When considering getting this type of loan, seek lenders with best reputation with fair terms like Associates Home Loan. Closely review the fees, interest rates, and terms. Needless to say, a lender’s proven and trusted loan history will get you a closed deal without the hassle of last minute change of terms.
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