How to Use Hard Money Loans to Save Your House
If you are struggling to qualify for a mortgage, or if you need help paying for the mortgage on your current home and the bank won’t help, a hard money loan can be your ticket out.
What Is a Hard Money Loan?
Like any other loan, a hard money loan is a sum of money that is borrowed from a lender. The exact terms of the loan will vary based on the contract between borrower and lender. The borrower receives the money, while the lender receives monthly interest on the loan until it is paid back in full. The lender will also often charge the borrower an up-front, one-time fee in order to process the loan. A hard money loan is backed by the physical asset, which is the property being purchased. More traditional loans are based on the borrower’s credit score.
Who Needs a Hard Money Loan?
Hard money loans are also used by individuals who are unable to get a mortgage from a bank due to a poor credit score. They may have poor credit, but still have enough equity in their property to have the hard money lender interested in making a loan. This scenario can be seen when an owner is facing foreclosure on a property.
Benefits of a Hard Money Loan
1. Quick Process: Since you are working with one individual lender, or a small group of lenders, there are fewer hoops to jump through. Hard money lenders are not interested in your credit score or how much debt you have.
Since the property is the asset that is backing the loan, they are only interested in how much value they see in the property. Depending on your lender, you could have your loan in a few days or a few weeks. It could take one to three months to secure a more traditional mortgage.
2. You Can Borrow More: With a traditional mortgage, you have to put down a minimum of 5 percent of the purchase price. Banks prefer for you to put down 20% of the purchase price, which will often give you better terms on the loan. With a hard money loan, the lender may be willing to lend you 100 percent of the purchase price. Without a down payment, you would only be responsible for paying the origination fee and the monthly interest until you pay the loan off in full.
3. Good When Starting Out
Hard money loans are not right for every investor, or for every investment, but they can be a great starting point. When you are just starting out, these loans allow you to purchase property with very little money of your own. Once you have established yourself a bit as an investor, you may be able to secure a line of credit from a bank instead of using a hard money loan, which will have a much lower interest rate.
4. Establish Relationship
Just as you can establish a relationship with a bank or other lending institution, you can establish a relationship with your hard money lender. If you have shown a history of honoring the terms of the contract and paying your loan back on time, or even early, the lender will likely want to work with you in the future.
Hard Money Loan Risks
1. High Interest Rate: One big downside of a hard money loan is that they often come with very high interest rates. It is not uncommon to see interest rates between 10 percent and 20 percent on these types of loans. The lenders know they have the upper hand because you have very few options for securing a loan.
Since they are also taking a risk by loaning so much money, they want to make sure you have an incentive to pay it back quickly.
2. High Origination Fee: An origination fee is a fee the lender will charge to process the loan. It is a percentage of the loan.
Again, since this is a riskier investment, the hard money lender is trying to protect themselves. It is not uncommon for the lender to charge as much as five times the amount of a normal lender. For example, if a typical bank charges one percent of the total loan as an origination fee, a hard money lender could charge five percent of the total loan.
3. Not Long Term: While it is common to have a 15-year mortgage or a 30-year mortgage, this is not the case with hard money loans. While every contract is different, these loans will often have to be paid back within a few months or a few years. If the loan is not paid back within the first few months or year, the already high interest rate could increase.
Hard money loans are not for everyone. They can be risky and expensive, but if you are in a tight spot with getting a mortgage, they might work out well for you. If you want to learn more about hard money loans or how to obtain one, I’d love to talk with you. Contact me by clicking here. I look forward to speaking with you!