Hard money loans are a type of loan that is secured by real estate property. Hard money loans are usually offered by private lenders or investor groups, rather than banks or other traditional lenders. Hard money loans are often used by real estate investors, flippers, or developers who need fast and flexible financing for their projects.
Benefits of hard money loans
Hard money loans have several benefits, such as:
- Fast and easy approval: Hard money loans are based on the value of the property, rather than the borrower’s credit score, income, or financial history. This means that the approval process is faster and easier, as the lender does not need to perform extensive background checks or underwriting. The borrower can usually get the money within days or weeks, rather than months.
- Flexible terms and conditions: Hard money loans offer more flexibility and customization than conventional loans, as the lender and the borrower can negotiate the loan amount, interest rate, repayment term, and other features. The loan can also be tailored to fit the specific needs and goals of the project, such as the type, location, and condition of the property.
- No prepayment penalties: Hard money loans do not have prepayment penalties, which means that the borrower can pay off the loan early without incurring extra fees or charges. This can save the borrower money on interest and allow them to exit the loan sooner.
Drawbacks of hard money loans
Hard money loans also have some drawbacks, such as:
- High interest rates and fees: Hard money loans have higher interest rates and fees than conventional loans, as they are riskier and more expensive for the lender. The annual percentage rate (APR) can range from 10% to 20%, or even higher, depending on the lender, the property, and the market conditions. The borrower may also have to pay origination fees, closing costs, or points, which can add to the cost of the loan.
- Short repayment term: Hard money loans have short repayment terms, usually between 6 months and 5 years, depending on the lender and the project. This means that the borrower has to repay the loan in full within a short period of time, which can be challenging if the project does not generate enough cash flow or profit. The borrower may also have to make a large balloon payment at the end of the term, which can be difficult to afford.
- Risk of losing the property: Hard money loans are secured by the property, which means that if the borrower fails to repay the loan, the lender can foreclose on the property and sell it to recover the debt. This can result in the loss of the property, as well as the equity and the investment that the borrower has put into it.
How to compare and choose the best hard money loan for you?
To compare and choose the best hard money loan for you, you should consider the following factors:
- Interest rate and APR: The interest rate and APR are the most important factors, as they determine how much you pay for the loan. You should look for the lowest APR possible, and compare the APRs of different lenders and loan options. The APR includes the interest rate and any fees, and reflects the true cost of borrowing.
- Loan amount and term: The loan amount and term are the amount of money you borrow and the length of time you have to repay it. You should only borrow what you need and what you can afford to repay, and choose a term that fits your budget and goals. A shorter term means a higher monthly payment, but less interest. A longer term means a lower monthly payment, but more interest.
- Fees and charges: You should also check if the lender charges any fees or penalties for the loan, such as origination fees, closing costs, or points. These can increase the cost of the loan and reduce the amount of money you save. You should look for a lender that offers low or no fees, or that waives or reduces the fees for certain borrowers or situations.
- Customer service and reputation: You should also consider the lender’s customer service and reputation, as well as the ease and convenience of the application and funding process. You should look for a lender that has positive reviews, responsive service, and transparent policies. You should also check the lender’s accreditation, ratings, and complaints with the Better Business Bureau or other consumer protection agencies.
Where to get a hard money loan?
There are many sources of hard money loans, such as online lenders, private investors, or hard money brokers. You can use online tools, such as LendingTree or Bankrate, to compare different sources and options. You can also check your eligibility and apply for hard money loans using the Hard Money Lenders or LendingHome websites.
Before you apply for a hard money loan, you should check the value of the property and compare it with the amount you want to borrow. You should also prepare your property title, your driver’s license, your proof of income, and your proof of insurance. A hard money loan can be a useful tool to borrow money with real estate as collateral, but only if you use it wisely and responsibly.