Investing Your Money Properly

What You Should Know About Hard Money Loans

9 June 2015 by Penny Evans

Borrowing money for a major investment such as a home, rental property or commercial building can be tough, especially if your credit score isn't looking so hot these days. It's why a growing number of people are turning to unconventional forms of lending to get the financing they need.

Hard money loans offer an opportunity to those who've been turned away when applying for traditional loans. Read along to find out how it works and what you should look out for when applying for one from a lender like Lima One Capital.

There are Many Different Types of Hard Money Loans

Surprisingly, there are several different types of loans you'd think were traditional loans, but are actually considered hard money loans:

• Equity loans: These loans utilize equity — the difference between your building's outstanding balance and its fair market value — to provide a lump sum of cash for borrowing purposes. Equity loans are junior to first mortgages, meaning an equity loan provider can step in to make payments on a defaulted mortgage and exercise its right to initiate a foreclosure.
• Bridge loans: Commonly used by sellers looking to purchase a new home before selling their existing home. This often makes it easier for borrowers to apply down payments onto a new home and move forward with the sale of their current home. Bridge loans often have high fees and numerous origination points, although this is largely offset by the loan itself carrying no payments for an initial 3 to 4-month period.
• Mortgage refinancing: This type of loan effectively pays off one or more property loans, resulting in a brand-new loan with a sometimes-larger principal balance. This often involves taking out a loan slightly larger than the old loan amounts.

The Qualifications are Different from Traditional Loans

When it comes to traditional loans, credit scores and credit histories tend to take precedence over other indicators of financial health. This often shuts out borrowers who are otherwise ideal for a traditional loan, but have a less-than-favorable credit score.

Instead of looking at the creditworthiness of the borrower, a hard money lender approaches the loan in the same way one would look at an investment. The lender takes a look at the value of the property in question and makes sure there is enough equity available to cover the loan in the event of a default.

This is why you won't be able to borrow as much with a hard money loan as you would through a traditional loan. Whereas traditional loans may offer up to 90 percent of the value of your collateral, hard money lenders typically offer 50 to 70 percent of the value.

The Interest Rates and Fees are Usually Higher

Hard money loans usually come with higher-than-normal interest rates when compared to traditional loans, largely due to the greater amount of risk involved. It's not out of the ordinary for a hard money loan to have interest rates ranging from 10 percent to as much as 26 percent. It's also not out of the ordinary to face prepayment penalties, steep origination points and various other fees.

Shorter Borrowing Periods

A typical hard money loan has a much shorter borrowing period than most traditional loans. These loans can last for as little as 3 months or for 12 months or more. If you need a longer borrowing period, then you may be able to negotiate an alternative payoff arrangement with your lender.

On the upside, it doesn't take long for a hard money lender to approve and fund a loan. Since these lenders aren't quite subject to the same processes and procedures governing traditional loans, many hard money lenders are able to grant borrowers access to their money in as little as 24 hours. This makes hard money loans a staple for those who need cash-in-hand within a short amount of time.

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