What is a hard money loan?

Many people will have the frustrating experience of having a loan request turned down by a bank at some point in their lives. Some people will learn before they even apply for a loan that their specific situation does not qualify for bank financing. Others will only gain this knowledge after spending several weeks or longer trying to walk through a bank’s difficult and stressful loan process. Regardless of how you have learned that bank financing is not right for your current situation, you may still have one financing solution available to you. Hard money loans are generally more expensive than bank loans, but they can be used intelligently to help you generate huge profits from real estate investments.

How Hard Money Is Used

A typical real estate bank loan is usually intended for a long-term hold. For example, a residential property may be purchased as an investment with a bank loan, and the bank loan may have a 30-year term with affordable monthly payments. These low monthly payments are instrumental in the investor’s ability to generate monthly cash flow. Hard money is used for different types of real estate transactions. The unique requirements for hard money loans as well as their loan terms make them more well-suited for short-term holds, renovations and fast closings. There are many types of residential and commercial projects that could be very profitable for investments that fall into these categories. When bank loans are not a reasonable financing option, hard money usually can fill in the gaps so that you can get the financing that you need.

Why Hard Money Loan Terms Are Different

Hard money loans have very different loan terms than a traditional bank loan. In comparison to a real estate loan offered by a bank or a credit union, you can expect the term to be shorter, the loan to be partially amortized or to have an interest-only payment, the rate to be higher and the fees to be more expensive. While these terms may seem less than ideal in most cases, the specific types of scenarios that hard money is used for make the terms attractive to many investors working with unique real estate opportunities. Hard money loan terms are also different than bank loans because of the source of funds and how the loans are analyzed. Hard money is private money. Small companies and private investors use their own funds to make the loans. They are not limited by bank underwriting guidelines. Instead, they can analyze projects on their own based to determine their merits. Hard money is often used when bank loans are not an option.

The Qualifications for Hard Money Loans

If you are interested in applying for a hard money loan, you need to understand what some of the qualifications may be. Hard money loans do not have the same applicant requirements that bank loans have. For example, hard money loans do not usually require an applicant to document a specific debt-to-income ratio or to meet a minimum credit score requirement. The primary requirements for hard money loans relate to the value of the property. In the case of a rental property, bank loans often need to see that the property is currently producing income. Hard money loans do not usually have this requirement. The value of the property rather than its current income is the most important factor.

Hard money is a thoughtful financing solution when bank loans are not reasonable or possible. Many real estate investors use hard money loans regularly to profit from renovations and flipping. Regardless of whether you need hard money for this type of real estate project or for another unique situation, you may be pleased with how fast and easy the loan process is. The first step is to discuss your scenario with a hard money lender and to formally apply for the loan that you need.

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