Hard money loans are for borrowers who do not have the best credit history or those who need to secure a loan quickly. These types of loans do not come from the traditional mortgage lenders such as banks. Instead, they come from an individual, private investors, or a fund of investors. The loan is given based off of a physical property or asset that will be used as collateral for the lender. This is why hard money lenders are not concerned with your credit score or level of income. As long as you have a piece of property, be it a single-family residential, multi-family residential, commercial, land, or industrial, that the potential lender can put a value on, they are likely to approve your loan. If you default on the repayment of the loan, they can then simply seize your property as collateral and resell it to gain back their money.
Hard money loans are short-term bridge loans. The period of the loan agreement is usually set around 12 months. However, since hard money lenders do not use the traditional underwriting process as commercial loans, the loan term can be extended to last two to five years. Interest rates for hard money loans are usually higher than traditional loans. They require either monthly payments of interest alone or monthly payments of interest and a little principal, with a balloon payment once the end of the loan term is reached.
Borrowers tend to opt for hard money loans for various reasons, but mainly due to their speed of approval, approval rate, and flexibility. Since a hard money lender is more concerned with the value that your physical asset, or collateral holds, as opposed to your finance history, as long as you obtain a relationship with said interested lender and have said collateral, you will be able to close a loan fairly quickly. As hard money loan deals do not operate under the same strict policies that traditional loans do, and they look at each proposed deal on an individual basis, they allow for more flexibility. You can negotiate certain things, such as a longer loan term. It makes for a somewhat more personable loan experience.The maximum Loan to Value Ratio, or LTV for a hard money loan is usually pretty low, at around 50 to 70 percent. This makes it easy for the lender to know that they can turn over your property to gain their money back if you fail to repay them. Whether you are investing in a property, or trying to keep your own, it needs to be valuable enough for them to place an equity on it. This is why hard money loans tend to be approved at much higher rates for people of all backgrounds, bad credit or not. Hard money loan lenders may not even look at your credit history.
While hard money loans are easier to get access to, and have a faster overall approval process, they can be very expensive. It is up to the lender to determine what your collateral is worth. If you cannot repay the cost that they decide on, you risk losing a lot of money. If you think you can confidently make enough money to pay the amount they choose to loan back within the given borrowing period, a hard money loan may be for you.