What is a hard money loan?

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By CraigNewby

Have you recently stumbled upon a real estate project that could generate a huge profit for you? You may have crunched all of the numbers, and your deal seems to make excellent sense. The only hang-up is that you know that you could never get bank financing for it. Through your previous experience with bank real estate loans, you may be well aware that banks and other financial institutions have very specific underwriting criteria that loan requests need to meet. These are usually guidelines for the property as well as for you as the borrower. For example, a bank may require loan applicants to have at least a 650 minimum credit score. You may be thinking about passing on this incredible financial opportunity because of a lack of funding, but there may be a better option available. When you learn more about hard money loans, you may decide that this is an excellent financial solution to meet your current needs.
Exploring Hard Money Loans
If your loan scenario will not meet a bank’s guidelines, you may wonder how a lender would be able to approve your loan request. The answer is simple. Hard money lenders do not have stringent underwriting guidelines. Hard money loans are funded by private financing companies or even by private individuals in some cases. This means that they essentially create their own rules. In most cases, as long as you are pledging property as collateral and as long as that property’s value substantiates your requested loan amount, you may be approved for your hard money loan request. Be aware that hard money lenders usually do not have lending requirements for the applicant, such as credit score requirements. However, each hard money lender is different, and you should thoroughly explore the options before applying for your new loan.
Analyzing Hard Money Loan Terms
Because lenders have the flexibility to consider virtually any type of real estate scenario that you bring to the table, they do not have a specific set of loan terms that they apply in a uniform fashion. Instead, the loan terms are generated based on the specific details of your loan request. While loan terms vary from project to project as well as from lender to lender, there are some generalities that apply to hard money loans. For example, most hard money loans have an interest-only payment, or these loans are only partially amortized. This means that you will have a large balloon payment as your final monthly loan payment. Hard money loans may have interest rates that are similar to or even higher than your credit card interest rate, and loan fees are usually higher than bank loan fees.
Determining If Your Project Makes Sense
As you can see, the loan terms for a hard money loan are not as competitive as a typical bank real estate loan. The fact that there is a balloon payment generally means that the monthly loan payment can potentially be affordable despite the short loan term. When you are trying to decide whether to apply for a hard money loan or not, determine if the monthly payment is reasonable given the cash flow of the property currently. Explore your exit strategy in detail. For example, if you plan to sell the property after a renovation, what is the projected market value and sales price of the property? Does the financing support a reasonable profit for you?
Hard money loans are unlike other real estate loans that you may be familiar with currently, but after you have used hard money loans a couple of times, you may decide that this is an excellent financial resource that you can take advantage of repeatedly. Finding a few reputable hard money lenders is the first step to take. You can then establish a working relationship with your preferred lenders so that you can potentially fund future loan requests faster and easier.