Many Americans want to own a home or buy investment properties. In most cases, conventional mortgages from a mortgage lender are the best choice. However, there are scenarios where a regular mortgage may not be ideal. Some home buyers may want to use a hard lending money to pay for a residence or investment property in the short term financed by a hard money loan backed by private lenders. If you are considering a harm money lending, keep reading to learn how to qualify for hard money loans this year.
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What Is a Hard Money Loan in 2024?
A hard money loan, also known in some quarters as a bridge loan, is a short-term loan that investors and some home buyers use.
Most parties use hard lending money for flipping houses, using the hard money loan to purchase and rehab the house before selling it to an investor.
Some homeowners may also consider a hard money loan if they are facing foreclosure.
A hard money loan is not usually based on one’s personal credit. Instead, the loan is given based on the value of the property it is attached to. If the homeowner or investor does not keep up with loan payments, the hard money lender can take the home.
Most hard money loans are for the short term with a higher interest rate, usually for six months or a year. That is why hard money loans are usually obtained by people who rehab houses and sell them within a year or less. Hard money loans are higher risk for the lender, but they offer a considerable amount of profit in a short time. Many hard money loans are interest only with a balloon payment at the end.
How Hard Lending Money Differ from Regular Mortgages
Hard money loans are in their own category apart from standard mortgages. First, hard money loans are relatively easy to get, whereas regular mortgages require an extensive application process. Again, the hard money loan is based on the asset’s value and not your personal credit and financial situation. Also, the repayment term on the hard money loan is much shorter than a 15 or 30 year mortgage.
The hard money loan also has a much higher interest rate than a regular mortgage, mainly because the loan has significantly more risk. Investment property loans always have a higher rate than mortgages on the property where the owner lives. Default rates are significantly higher on investment properties than personal residences.
Hard money lenders also have a significant down payment that may be larger than many regular home loans. Most hard money lenders expect you to have at least 10% or 20% down, but the requirement could be higher. On the other hand, many regular home loans can be obtained with only 3% or 5% down.
What You Can Expect When Borrowing Hard Money
Many people who first shop for hard money loans are surprised at how different then process is than shopping for a 30-year mortgage. Here is why:
• Hard money lenders have little oversight: The mortgage industry is highly regulated, but hard lending money has little oversight. Hard money lenders can charge what they want and largely set their own rules. If you don’t like the terms offered by one hard money lender, you should shop for another lender.
• Higher rates: Hard money lending is higher risk, so your rate will be much higher in most cases than a regular mortgage. It isn’t unusual for hard money lenders to charge 15% interest and various fees for their services.
• Loans are shorter term: It’s rare for a hard money loan to be used for more than a year, but some lenders may offer extensions.
• Different lending rules: Hard money lenders can largely set their own rules, including down payment requirements and interest rates.
Who Is the Ideal Hard Money Buyer?
Most people who get hard money loans are property flippers, those who don’t qualify for a regular loan, or those facing a foreclosure but have home equity:
• Investors who buy properties and renovate and resell them use hard money loans often. Investors use these loans because getting the cash is relatively easy and fast. If the lender is interested in the property and deal, they can often close a hard money loan in less than two weeks.
• People who don’t qualify for regular loans: There are some traditional homebuyers who may not qualify for a regular mortgage. For instance, if you got divorced and took a major hit to your credit, you may need a home loan but don’t qualify for a traditional mortgage. Or, you could own a small business and have difficulty documenting your income sufficiently for a regular home loan.
• Homeowners facing a foreclosure. Some homeowners could have significant equity but have difficulty making payments. A hard money lender may consider offering a loan because they know if the loan isn’t paid, they can pay off the home loan and keep the home’s equity for profit.
How To Qualify for Hard Lending Money
Most of the regular rules for qualifying for a mortgage do not apply to hard money loans. The most important qualification you need to get a hard money loan is to be requesting money for a property that has significant potential value for the lender. If you want to rehab a property that is a mess, the lender could still lend to you because they know it can be fixed and sold at a profit if the loan goes south.
The other major requirement for a hard money loan is having enough money to put down. Most hard money lenders require you to have at least 10% or 20% in the deal, plus the ability to pay their administrative and loan fees. Take advantage of the Home Equity Mart will help you shop the best hard money lenders online offering unique private financing with no application fees.