People apply for hard money loans because they need quick access to cash without meeting the strict criteria of traditional banks. Lenders such as Lendersa provide these loans based more on property value than credit history, which helps borrowers with poor credit or unique properties.
One of the most significant risks associated with hard money loans is the possibility of losing the property used as collateral in the event of loan default. Since hard money loans are secured by the property itself, failure to meet repayment obligations can result in the lender taking possession of the property.
Tell your lender about yourself. Private lenders want to know the person behind the numbers, so in addition to a loan application and financial information such as copies of your credit reports and tax returns, you'll also want to include a resume that showcases pertinent experience for your planned project .
Hard money loans offer a non-traditional financing option with faster closings and more flexibility than traditional bank loans. To increase chances of getting approved, borrowers should pay off debts, provide up-to-date financial documentation, and show employment/asset documentation.
There are two main ways that you can exit your hard money loan; selling your property and using a portion of the proceeds to pay off the loan, or refinancing into a new loan, and using the new loan to pay off the hard money loan.
Property Loss by Foreclosure
Hard money loans are asset-based, which means that they are secured by the asset, in this case the property. The property serves as collateral on the loan. So, if a borrower cannot repay the loan, the property can be seized by the hard money lender.
Where a traditional loan can take weeks to obtain, hard money lenders can provide funding in a matter of days. Credit checks and some minimal review of your personal financial situation are almost always required. Appraisals, too, are almost always required.
Unlike a traditional home mortgage, hard money lenders typically only charge interest on a monthly basis, which means you don't actually pay any money toward the principal loan amount at each monthly payment cycle. However, you will have to pay back the full principal amount at the end of the loan's life cycle.
Here are the common types of prepayment penalties you might encounter: Fixed Penalty: This is a flat fee or percentage applied if you repay your loan early, as is the case with Yieldi's 3% penalty if paid before 6 months. The penalty amount remains the same regardless of when within that period the loan is paid off.
Interest rates — The average interest rate on a hard money loan is about 11.25%, but it can range between 7.5% and 15%. (Loan Ranger Capital offers standard interest rates between 10.9% and 13.9%, and our Top Shelf program offers interest rates as low as 7.9%.)
Typically, hard money lenders focus on the asset's value rather than the borrower's credit score. However, this doesn't mean these loans are invisible to credit bureaus.
This type of funding is considered more flexible than what banks or other traditional lenders offer. Because hard money loans require borrowers to use their assets as collateral, private lenders are often more willing to work with borrowers with bad credit or more modest cash reserves.
Cash out and refinance loans can be funded in as few as 3-5 days for investment property while owner occupied hard money loans take 2.5-3 weeks due to current federal regulations.
Many borrowers rely on hard money lenders because they don't have the time to wait for a conventional bank to complete their underwriting. The real estate market is extremely competitive, and sellers are more likely to accept offers with shorter closing timeframes. Less hassle, less headache.
About no appraisal FHA mortgage home loans
The federal government insures the FHA mortgage lender against losses so banks are able to offer you the lowest FHA interest rates even though there is no appraisal required. No Appraisal FHA Mortgages are a great way to buy a home without the hassle of appraisal problems.
In order to offer a fast closing time, hard money lenders typically don't look into your credit history. They mainly base the loan amount on the collateral's value. You'll also likely be limited to a 65% to 75% loan-to-value (LTV) ratio — the lender wants to limit its risk in case you default.
Your lender may ask you to provide a down payment of 10% to 30% (or more) on your hard money loan. Generally, the stronger your credit and financial qualifications, the less of a down payment you'll need to provide. However, a larger down payment may help you access better rates and terms.
The bank will pay off the hard money loan and the investor will now be responsible for a long-term mortgage at substantially lower interest rates. The net proceeds from the rent they charge and this mortgage payment will mean cash in their pocket every month, all while building equity in their portfolio.
You may be taken to court
On that note, you can be sued for not paying back a payday loan, even if the loan amount is small.
A hard money loan is a short-term property loan, primarily secured by real estate. Hard money loans are funded by private investors. Hard money loan rates can go up to 15% with three- to 36-month terms. Points to close on hard money loans normally fall between 2% and 10% of the loan amount.
However, if you default on the hard money loan, the lender can take the property and sell it while the accumulated fund will be used to pay off the outstanding loan. The lender can sell the home lower than the original sales price to get the money back.
This type of refinance typically has a waiting period, usually ranging from 6 to 12 months after the initial hard money loan disbursement. This waiting period allows the property to “season,” giving lenders more confidence in its value and your ability to repay the loan.