For everyone who lived through the financial crisis of 2008, the phrase "hard to loan programs or money loans" probably conjures up images of shady or predatory lenders that helped contribute to the disastrous housing crash. Because of this, most people don't have a good understanding of what hard money loans actually are or why they are used. In fact, hard money loans have been around since the late 1950s and remain an important alternative to traditional mortgage loans.
What Are Hard Money Loans?
Simply put, hard money loans, also called “bridge loans,” are mortgage loans from private investors that use the underlying property as collateral to secure the loan. If a borrower cannot repay the loan, the lender simply takes back the property and sells it to get their money back.
Hard money loans provide a way to borrow money without going through a traditional mortgage lender such as a bank -- instead, hard money financing is usually lent privately, either by an individual or by a private company. As a result, the loan process is usually much quicker and is not centered around factors such as income availability or credit score. Instead, hard money lenders lend based solely on the value of the underlying property.
Pros And Cons of Hard Money Loans
Because hard money lenders typically do not concern themselves with a borrower's credit score or income, these loans are often a great choice for those who would not be candidates for traditional loans. Since these loans are backed entirely by a physical asset -- the property -- borrowers do not have to prove they have a reserve of wealth to cover repayment.
Additionally, hard money loans tend to have terms that are more flexible than traditional loan terms. Because the loans are backed by property or investment properties, which can vary widely in value, there is no one strict set of underwriting rules that hard money lenders adhere to. Instead, each loan is evaluated individually. As a result, depending on who the lender is (and the relationship they enjoy with the borrower), there may be room to negotiate things like repayment schedules.
Another major plus for hard money loans is the fact that they are usually processed quickly and can give borrowers more money upfront without the need for a down payment. Because hard money lenders tend to do not to need to scrutinize credit scores and borrowing history, hard money loans usually can be closed in a matter of days, giving borrowers a chance to have cash in hand much faster.
The main drawback of these kinds of loans is the high-interest rates, which are used to offset the relatively large risk hard money lenders assume. Since these traditional lenders do not rely on credit scores, less is known about a given borrower's history, which translates to a generally riskier lending scenario. So, while traditional mortgage loans may come with an interest rate of around 4-5%, hard money loans can often have rates that exceed 10%.
Hard money loans are usually shorter-term than traditional loans, maturing in a matter of months rather than years. As a result, they tend to be preferred by people like real estate developers, who plan to hold onto the property for only as long as it takes to renovate and resell it. Since these individuals complete their renovation projects relatively quickly, the high-interest rates characteristic of hard money loans don't pose as much of a problem. Alternatively, if a renovator wants to hold onto the property for a while, they obtain hard money loans to complete their projects, then refinance the hard money loan pros with another, more traditional lender to take advantage of lower interest rates.
Working with a hard money lender typically involves the following steps:
1. Identify a reputable lender: Research and identify hard money lenders who specialize in real estate investing in the type of loan you need and have a good reputation in the industry. Seek recommendations from real estate professionals or conduct online research to find suitable lenders.
2. Submit loan application and documentation: Contact the lender and provide them with the necessary information to initiate the loan application process. This may include details about the property, your financial situation, your credit history and any other relevant documentation they require.
3. Property appraisal and evaluation: The lender will assess the value of the property being used as collateral. They may conduct an appraisal or inspection of commercial property to determine the property's condition, market value, and loan-to-value ratio (LTV). This evaluation helps the lender determine the loan amount they can offer.
4. Review and negotiation of loan terms: Once the lender reviews your application and evaluates the property, they will present you with their loan terms. This includes the loan amount, interest rate, fees, and repayment period for investment property. Take the time to carefully review and negotiate the terms to ensure they align with your financial goals and capabilities.
5. Loan approval and funding: If you agree to the lender's terms, they will proceed with approving your loan. This traditional financing process is typically faster than traditional loans due to the simplified underwriting criteria. Once approved, the lender will provide the funds either through a lump sum or in installments, depending on the agreed-upon terms.
6. Repayment of the loan: Hard money loans usually have short repayment periods. During this time, you will make regular payments as per the agreed-upon schedule. Some loans may require interest-only payments, with the principal repaid in a lump sum at the end of the term. It's important to have a repayment plan in place to ensure you can meet your obligations short term loans.
7. Consider refinancing or exit strategy: Hard money loans are often used as temporary financing. It's crucial to have a plan in place to either refinance the hard money loan rates down with a conventional lender or have an exit strategy to repay the loan when it comes due. This could involve selling the property, securing long-term financing, or other means of repayment.
It's important to note that each hard money loan lender may have their own specific processes and requirements. It's advisable to communicate openly with the lender, ask questions, and fully understand the terms and conditions before proceeding with a hard money loan.
GROUNDFLOOR's Hard Money Loans
GROUNDFLOOR is an alternative hard money lender for individuals looking to complete short-term residential real estate projects. Borrowers enjoy flexible terms, fast closing, and competitive interest rates, while also offering the option to defer payment to the end of the loan term, rather than paying on a monthly basis after repair done.
To read an overview of the lifecycle of a GROUNDFLOOR loan, click here.
To read more about how we evaluate the risk of a given loan, click here.
To learn more about borrowing with GROUNDFLOOR, we invite you to visit our website and fill out our initial rate quote form in just a few minutes.
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