A hard money loan is often referred to as a private money loan. This type of loan is secured by real estate and is for the short-term. Conventional lenders are usually credit unions or banks. Hard money loans are funded by groups of investors or private investors. The term is generally twelve months although this type of loan can often be extended to two to five years. The monthly payments can be interest and principle or just interest and there is a balloon payment when the term ends. The amount of the loan is based on the value of the real estate used as collateral by the borrower.
The main concern of a hard money lender is the value of the property, not the credit of the borrower. Despite this, the lenders generally place some importance on the credit of the borrower. Hard money loans are often acquired by individuals unable to obtain financing due to a short sale or a recent foreclosure. If the individual still has enough equity in the property and is willing to use the real estate as collateral, they can receive a hard money loan. This is a good option when the banks have refused to issue a loan.
There are numerous types of properties that qualify for a hard money loan. This includes both single and multi-family residential properties, land and industrial and commercial properties. Some hard money lenders specialize in specific types of properties and will not grant loans for any other type due to a lack of experience in other areas. Extra regulations and rules prevent most of these lenders from providing a loan on any residential property occupied by the owner. Some are willing to do the additional paperwork and grant the loan.
Hard money loans are an option when conventional financing is not available. The approval process is also much shorter than with a conventional loan. This type of loan is ideal for individuals with credit issues, fixing and flipping houses, fast action by a real estate investor, construction loans and land loans. In most cases, a hard money loan is received in about a week. The average time necessary for a bank loan is 30 to 45 days. The application process rarely requires more than one or two days and the loan may be approved the same day.
One of the biggest advantages of a hard money loan is the fast funding. This is especially true for real estate investments with a need for a fast close or numerous competing bids. The borrowers have also been rejected for a conventional loan by the banks. This can happen due to credit issues, foreclosures and short sales. Banks require a solid income history. This works against anyone who recently began a new job despite the amount of their income. Hard money lenders are not concerned with these issues. All they require is equity in the property and repayment.
The points and interest rates hard money lenders charge vary between the different lender and regions. In areas where a lot of hard money lenders are located, the rates are generally lower due to the competition. A loan from a hard money lender is riskier than when granted by a bank. This means the interest rates will be higher than for a more traditional loan. The interest is determined by the lender but generally ranges from ten to fifteen percent. The lender will factor in the risk for the loan in the interest rate.
The primary concern of any hard money lender is the equity of the borrower because this is the collateral for the loan. The credit rating is considered much less important. If the borrower has enough capital available to make the loan payment in addition to the equity, chances are good the loan will be approved.