An unfathomable number of financial mistakes stem from a lack of knowledge about different money topics. You see this with incredible prevalence when the discussion turns to loans. Too many people don’t understand the different types of loans or what loans are applicable to their situation. Hard money loans are usually one of the more commonly misunderstood loan types, so this blog will help you understand what they are and whether or not you should bother with them.
What Is A Hard Money Loan?
A hard money loan functions like any other loan in the sense that you’re borrowing money from a lender. The difference is that “hard money” refers to specific hard assets that are secured against the loan. 99% of the time, property is used as the “hard asset” in this scenario, meaning you receive a loan that uses your property’s value as collateral.
The amount of money you receive from your loan depends on the value of your property. This is what the lender cares about, and they likely won’t perform a credit check – as is the case with more “traditional” loans. A hard money loan is also considered a short-term loan as the terms & conditions normally dictate that repayment occurs within 24 months.
What Are Hard Money Loans Used For?
The nature of hard money loans means they’re only really used for real estate transactions. As explained by FasterFunds Hard Money Lender, this type of loan is designed for:
- Property flippers who need money to “fix” their new investment before selling it and repaying the loan.
- Landlords who need to buy a property and get money for repairs before converting to a more permanent loan.
- Wholesalers who need to close on a property before their retail buyer can close.
In other words, there’s not really any point in picking one of these loans unless you fall into one of the three categories.
One other huge thing to note is that a hard money loan is not a mortgage loan. Mortgage loans are technically used for real estate, though you need a good credit score, and the value of your property isn’t used as collateral; it’s used to determine how much money you need to borrow. If you’re buying a house to live in, then you’ll need a proper mortgage, not a hard money loan.
What Are The Pros & Cons Of Hard Money Loans?
Hard money loans are beneficial if you’re a real estate investor who needs a quick injection of cash. These loans have very fast approval rates (sometimes in under 24 hours), and they don’t take your credit score into account, so it doesn’t matter if you have bad credit.
The downside is that the loan terms are much shorter than traditional loans, and they can come with high interest rates. That’s why they’re only suitable when you need short-term funding and can afford to make all repayments within the allocated timeframe.
In summary, hard money loans are loans that use your property as collateral instead of checking your credit score for eligibility. They’re of the short-term variety and are useful when making certain real estate purchases – but not so useful for anything else. If you need to borrow money for other reasons, then you’re better off checking different credit cards or getting personal loans.
FAQs:
What is the typical interest rate on a hard money loan?
Hard money loan interest rates can vary widely but often range from 8% to 15%, depending on the lender, property, and market conditions.
Can I use a hard money loan to buy a house to live in?
No, hard money loans are intended for investment purposes only, such as property flipping or rental property acquisition. For a primary residence, a traditional mortgage is required.
How fast can I get approved for a hard money loan?
Approval for a hard money loan can often happen within 24 to 48 hours, with funding available shortly after, depending on the lender’s process.
Do I need good credit to qualify for a hard money loan?
Not necessarily. Most hard money lenders focus on the value of the property used as collateral rather than your credit score.
What happens if I can’t repay a hard money loan?
Failure to repay can result in foreclosure, where the lender takes possession of the property used as collateral. It’s crucial to have a repayment or exit strategy in place.
