Borrowing Basics: What Is A Hard Money Loan?

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You might have heard the term ‘hard money loan’ before – but many people investing in real estate fail to understand what it means. We’re going to go through everything you need to know about hard money in this guide, so read on to find out more.

What are hard money loans?

Hard money lenders allow people to borrow money against the value of their real estate – or property they intend to buy. They are often more expensive than normal mortgages, but there are plenty of benefits. Lenders will offer loans much quicker than a typical bank, so it can give you access to important money sooner. And, they won’t base the loan approval on a credit score.

Who uses them?

Many different people use hard money loans. But, they seem to be most popular with property investors and home flippers. Investors can use the funds to buy a property – sometimes up to 100% of the value. They can then invest a little more in renovations and improvements, and sell on to make a profit. However, people with bad credit can also use hard money loans. If they want to make home improvements, for example, then a hard money loan is issued against the value of their home.

What types of hard money loan are there?

There are various types of hard money loans. According to Hard Money Phoenix, these include mortgage financing, bridge and residential equity loans. However, it’s important to understand that when you borrow hard money, they are often referred to as loans ‘of last resort.’

Who lends the money?

Hard loan lenders tend to be individuals or small groups or companies. It’s important to understand that not all hard loan lenders are of sound quality – and many could be classed as loan sharks. However, if you can find a reliable local hard money lender, they can be a valuable asset.

Are there any dangers?

As with all types of financial products, of course, there are plenty of dangers of taking out a hard money loan. Some interest rates can be much higher than typical mortgage rates – even those in the subprime category. The rates are understandable, as the risk of lending with no credit score is a big one for anybody handing out hard money loans. But, the risk for borrowers is a big one, too. You could lose your home if you fail to make your repayments. And, if you don’t pay it back early, you will end up increasing your repayable amount by a significant amount.

So, hard loans are best for the short term?

Absolutely. High-interest loans will always have their place, and they can be an excellent way of raising funds quickly. If you borrow money through a hard loan and can pay it back as soon as possible, they can often make sense. This is why so many real estate investors use them as a vehicle to finance buying property. They can borrow and pay for the home, and sell it on at a profit in a short space of time. This limits their exposure to interest and protects their profit margins. To conclude, be careful when using hard money loans – and pay them back as quick as possible.