When the market is tough, financing real estate can be challenging. Conventional lenders may demand more collateral or higher interest rates to approve your loan application. For several borrowers, hard money loans may be an alternative. Hard money loans are private mortgages that aren’t backed by traditional lenders but are funded by individuals or companies with significant wealth. These loans are typically more expensive than conventional financing and have strict terms, including a shorter repayment period and a high-interest rate. Below, we outline the need-to-know facts about hard money loans before you take the plunge.
What Is a Hard Money Loan?
A hard money loan is a private mortgage backed by the real estate’s value as collateral. It’s an alternative to a traditional loan where you put up collateral as security against a specific loan amount. Since hard money lenders aren’t held to the same conventional underwriting standards as banks or other financial institutions, they may approve your loan application even with a lower credit score, less equity, and/or a higher debt-to-income (DTI) ratio.
Hard money loans are typically more expensive than conventional financing because you’re borrowing from individuals or companies with significant wealth versus institutions with access to cheaper funds.
Where to Find a Hard Money Lender
You can find a hard money lender via social media or your network. Since this is a peer-to-peer loan, you’ll need to find lenders willing to fund the loan. If you don’t have a network, you can use a hard money lender finder to help you source potential lenders. When looking for a lender, you’ll want to choose carefully. Make sure that the lender is licensed and regulated. There are many hard money lenders online, so it’s easy to find them. Suppose you are based in Carolina, all you have to do is type North Carolina money lenders in Goggle’s search bar, and you’ll get a large list of lenders in your area. You can make a list of top lenders, compare their terms and conditions, and read online reviews of real customers so you can make a wise decision.
Things to Know Before Borrowing with a Hard Money Loan
Interest rates
Interest rates on hard money loans are higher than on mortgages or business loans. Unlike conventional lenders, hard money lenders don’t seek to make a profit or meet a certain return on investment (ROI) — they just try to get their money back. However, your interest rate will vary depending on the lender, your credit score, the property’s value, lender competition, and other factors.
Terms
Terms for short-term hard money loans can range from a few months to a year, and longer terms are more common for real estate deals. A typical term for a commercial real estate deal is six months to one year, with a balloon payment at the end of the term. Unlike conventional lenders, hard money lenders aren’t concerned with how long it takes to repay the loan.
Fees
Like conventional lenders, hard money lenders may charge closing or origination fees. You may also have to pay interest and principal from the date the loan is funded until it’s repaid.
Collateral
Unlike banks, hard money lenders aren’t concerned about whether your debt is underwritten. Instead, they’re more concerned with the collateral securing the loan. For example, if you’re borrowing for commercial real estate, the lender may require a first mortgage and a second mortgage as security for the loan.
Security Interest
The hard money lender will have a security interest in your loan, which means that if you don’t pay, they have the right to foreclose on your collateral. Unlike banks, they don’t have a lien on the title of your property.
Credit Score
Like banks, hard money lenders will check your credit score. But unlike banks, they may be willing to work with borrowers with lower credit scores.
Pros
- No equity or asset value required
- No appraisals
- Quick funding
- Flexible terms
- No balloon payment
Cons
- Higher interest rates
- Lengthy application process
- No lien on title
Borrowing hard money is an alternative financing option, but it isn’t right for all situations. This financing is best for borrowers with equity in their home or a significant amount of assets that can be placed as collateral. Unlike conventional lenders, hard money lenders don’t care about your credit score or the traditional lending underwriting process. Instead, they’re more concerned with the collateral securing the loan. This is why a hard money loan is a good option for borrowers with no equity, assets, or a high enough credit score to get a conventional loan.
