Alternative Loans – What are Hard Money Loans?
by Noah Bruegmann | Sep 07, 2015
So why would anyone in their right mind want a hard money loan (i.e. a real estate loan from a source other than a regular financial institution)? After all, hard money loans are almost always more expensive than conventional loans. They usually involve approximately 2% – 5% (or more) in “points” – the initial compensation to the broker or lender — and may bear interest at around 8% – 12% (or more).
In contrast, conventional loans obtained from banks, insurance companies, and other financial institutions almost never involve more than 2% and will usually bear interest at 3% – 5% (or lower) in the recent market environment. It is important to note that the rate and points will, of course, be impacted by the duration of the loan, the credit of the borrower, and the type of real estate involved in addition to fluctuations in the general loan market.
Unconventional way to get a loan
Regardless whether you are trying to buy a home or an investment property, conventional loans are designed for mass consumption. They only work under standard circumstances and are governed by inflexible bureaucratic rules. So, if you have good credit and want a 30-year fixed rate loan on a home you are buying, you will want and qualify for a conventional loan. If the loan agent can’t check all the boxes on the lender’s check list, however, you are out of luck because the loan agent can’t change the rules. This is where an unconventional lender can step in to help.
For example, if you are a foreign national, have a bad credit score, or you have lots of assets but no income, a hard money loan might be for you. Other circumstances in which you may benefit from a hard money loan include:
- Purchase of unimproved land
- Purchase of an unusual property, like a church or marina
- Need the loan to close within a week
- Don’t want any personal liability
In any of the above situations, a hard money loan could be your best bet. Nobody actually wants to pay a higher rate of interest by getting a hard money loan, but there are lots of circumstances when a conventional loan won’t work and a hard money lender can step in.
If you’re investing in real estate, hard money loans are considerably more flexible than their conventional counterparts.
In the simplest case, buying a unique property type can be impossible without turning to a hard money lender. Hard money loans can also allow for a higher return on investment. Because hard money lenders can assess property value for themselves, they’re often willing to loan at a higher loan-to-value ratio provided they see a strong potential for repair value improvements. Additionally, in competitive bidding situations, rapid funding offered by a hard money loan can sometimes make the difference when it comes to offer acceptance.
For a more in-depth discussion of investing with hard money, check out Hard Money Loans – An Investment Tool
Invest with poor credit
Real estate buyers with credit problems also often utilize hard money loans. For approximately the last 7 years (since the financial melt down in 2008), there have been many people who suffered severe financial distress leading to asset foreclosures, bankruptcy filings, and delinquent creditor accounts. These situations were especially common among those who made their living in the real estate industry, such as real estate brokers, contractors, developers, and investors.
Because of these financial problems, people were locked out of conventional loans due to failure to meet credit score requirements. Hard money loan fills in this gap because most hard money lenders are more flexible about credit scores. Many borrowers with poor credit scores use hard money loans as the pathway back to cheaper conventional loans because positive performance on a hard money loan is an effective way to repair a borrower’s credit rating.
As you might suspect of an industry covering so many use-cases, the hard money loan industry has many lender types. Most hard money lenders are licensed as real estate brokers and have only a few employees, which is great when you’re in the process of getting a loan because you have direct access to the decision-makers. However, it can be difficult to navigate when deciding which lender to choose. LoansEasily provides an online tool to help match borrower needs to appropriate hard money lenders. Check out their website here: www.LoansEasily.com
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