When it comes to financing a real estate purchase, or any larger purchase at all, there are a variety of loan options available to you. But if you’re finding that you’re being turned down for traditional loans or you need the money fast, a hard money loan might be the right option for you. Before you apply for a hard money loan, make sure you know these six things.
1. The Types of Hard Money Loans
There are two types of hard money loans: commercial and residential. Commercial hard money loans are typically used to finance the purchase of business property, while residential loans are for financing the purchase of a home. You’ll also need to make sure that you have a selection of hard money loans to choose from and to know exactly what you’re looking for. If you’re someone looking for a long-term investment, you might want to go with a 30-year hard money loan. On the other hand, if you’re looking for a quick fix and flip, you might want to go with a shorter-term loan like a 5-year or 7-year.
2. How to Qualify for a Hard Money Loan
Qualifying for a hard money loan is not as difficult as qualifying for a traditional loan because the lender is more interested in the value of the property than your credit score. However, you will need to have a down payment of at least 30 percent and show that you can repay the loan. You’ll also need to provide collateral, such as equity in another property, to secure the loan. For example, if you’re looking to finance a $100,000 property, you’ll need to have at least $30,000 for the down payment and $40,000 in equity to qualify.
3. The Terms of a Hard Money Loan
The terms of a hard money loan are usually much shorter than the terms of a traditional loan. Hard money loans are typically due in 12 months or less, while traditional loans can be for 30 years or more. This is because hard money loans are meant to be short-term financing options used to purchase properties that will be quickly resold for a profit. Because of this, interest rates on hard money loans are usually much higher than traditional loans, with rates ranging from 10 percent to 18 percent. Additionally, hard money loans often come with origination fees that can be as high as five percent of the loan amount.
4. The Process of Applying for a Hard Money Loan
Applying for a hard money loan is a relatively simple process. The first step is to find a hard money lender and fill out an application. Once you’ve been approved, you’ll need to provide the lender with documentation, such as property appraisals and proof of funds. Once the paperwork has been completed, you’ll be ready to close on the loan and receive your funding. Additionally, many hard money lenders offer pre-qualification, so you can know how much you’re eligible to borrow before you even start the application process.
5. The Benefits of a Hard Money Loan
Several benefits come with securing a hard money loan. One of the biggest benefits is that hard money loans are typically easier to qualify for than traditional loans. Additionally, hard money loans can be funded much faster than traditional loans, which is ideal if you’re looking to purchase a property quickly. And because hard money loans are secured by collateral, they’re often easier to obtain than unsecured loans. Finally, hard money loans can be used for a variety of purposes, including financing the purchase of an investment property, repairing or renovating a property, or even refinancing an existing loan.
6. The Risks of a Hard Money Loan
As with any type of loan, some risks come with hard money loans. One of the biggest risks is that if you default on the loan, you could lose the property that you’ve put up as collateral. Additionally, because hard money loans have such high-interest rates, you could end up paying a lot more than you originally borrowed if you’re not able to sell the property quickly. And finally, because hard money loans are typically for shorter terms, you’ll need to be sure that you’re able to repay the loan in full before it comes due.
Hard money loans can be a great option for investors who are looking to finance the purchase of an investment property. However, before you apply for a hard money loan, it’s important to understand the process and the terms of the loan. With this information, you can be sure that you’re getting the best possible deal on your loan. Just make sure to weigh the risks and benefits of hard money loans before you apply.