How Do Hard Money Loans Work?

Hard money loan san diego

The real estate industry is a complex and lucrative business. Following the real estate crash that occurred many years ago, the housing market has continued to rise. Houses are worth more, sellers are selling for above their asking price, and the market has pretty much recovered. Something that you commonly see during this recovery period is investment real estate. These are houses that are in poor condition. A home buyer might purchase one as a renovation living project. An investor might purchase one as an investment opportunity. Either way, these types of houses often require a different type of loan, a hard money loan.

How does a hard money loan work?
Hard money loans differ from traditional loans in a variety of ways. Firstly, you are not working with a bank or lending institution as you normally would. Instead, you are usually working with private money lenders. Secondly, and probably the biggest difference between the two is that your hard money lender is going to require a greater value of collateral. When you purchase a property on a traditional mortgage, the house is your collateral. If you stop making payments, the bank takes the house.

Although this is similar with hard money lenders, there are also additional lending requirements. For example, you have less time to pay the hard money lender back. Duration or payment period for a private loan is shorter compared to the traditional loan which can usually go from 1 year up to 20 years, while private loans can only be granted with duration of up to 5 years. For this reason, it is extremely important to understand your payments and ensure that you can afford them.

The desired speed of hard money loans
Perhaps the most common reason for obtaining hard money loans is for the speed of the funding. Traditional mortgages can take many months to approve. You could easily lose out on an ideal home during this time. If you are an investor, you could lose out on a great business opportunity. Hard money deals are often sought after for their quick turnaround (usually within 7 to 14 days). There are no other types of loans that allow you to have cash in hand that quickly.

Understand your interest rate
Hard money lenders take on an increased risk by offering hard money loans. They do not have as strict of requirements for lending, so the default rate is higher. For this reason, hard money lenders protect themselves with higher interest rates. You are going to pay more for borrowing the money than you would with a traditional lender. Hard money offers higher interest rates and lower loan to value ratios. Hard money interest rates can start at 15%, 18%, or higher. This is compared to between 4 and 6% for a traditional mortgage. If you only intend on borrowing the money for a short period of time, the interest rate is not as important. However, if you intend on taking a longer period to pay it back, a hard money loan may not be ideal.

Hard money loans and businesses
More real estate businesses and investors utilize the benefits of hard money loans than single buyers. They can usually flip a house quicker and can put up the needed equity. Getting the house back on the market quicker also reduces the high costs of increased interest rates. However, this does not mean that, as a personal investor, that a hard money loan is not an option.

The real estate market is rapidly growing. Although we started to see improvement over the last couple of years, it continues to grow at high rates. If you are interested in getting your hands on your own piece of real estate, either for residential or commercial use, consider using hard money lenders for your financing. Although they have higher interest rates for borrowing, you can receive the cash quicker and with less requirements.

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