Do you know what a hard money loan is? Well. It is the first step in breaking down the financing of real estate. It is the quickest method of securing a deal. This type of loan can become difficult to understand for some. So, you should learn everything about it before getting into it.
What Is Hard Money Loan?
A hard money loan is just a short-term loan acquired from private individuals against traditional lenders such as credit unions or banks. The term of such loans is generally 12 months, but it can be extended to 2-5 years. These loans require monthly interest payments or principal amount plus interest at the end of the term. The borrower can lend the money on the value of the subject property. Hence, this type of financing has more moderate criteria.
Pros and Cons
Let’s take a look at the pros and cons of such types of financing for real estate investors.
The benefits of hard money lending are as follows:
- Time is essential for everyone. So you can obtain this type of money lending in days or weeks (but it depends on negotiations).
- The banks lending loans to investors are not flexible.
- It requires collateral to safeguard the loan.
- It is more concerned with the subject property than the credentials of the borrowers.
- This type of money lending removes middlemen and hence, it is relatively convenient.
- You can fund several deals at a time with such kinds of loans.
Despite the benefits, hard money loan suffers from various limitations:
- The fees like origination fees and closing costs and interest rates are higher, ranging from 10 to 15 percent.
- The repayment schedule is short, anywhere between 6-18 months.
Who Should Use It?
Real estate investors use such types of loans. The only reason behind choosing hard money lending is funding the loan quickly. Traditionally, a loan can take up to 30 to 45 days to get sanctioned. But, in this case, it is obtained in a week.
When To Use It?
Though it can be issued for any type of property, some properties like rehab projects, land loans, construction loans, etc., are obtained through these loans. If the buyer of the property has credit issues, it is indeed worthy of waiting. Therefore, other types of investments can also be funded by hard money.