If you’re looking to purchase an investment home but cannot get a more conventional loan, then hard money loans are a great option.
There are hard money lenders all over the country who will lend you money to buy a home plus additional cash to make repairs.
These loans have interest-only monthly payments and have rates between 9%-15%.
In this article, we’re going to take an in-depth look at hard money loans to help you better understand them and decide if they’re the right fit for you.
What are Hard Money Loans?
A hard money loan is an interest-only short-term loan for a real estate investor that allows them to purchase property plus get additional cash to make repairs. Most hard money loans will lend up to 70% of the after repaired value (ARV).
Unlike most home loans, which will look at the borrower’s ability to repay by pulling a copy of their credit report and verifying gainful employment and solid income.
Hard money loans are given using the property as collateral. Hard money loans may be an option for borrowers with poor credit if they can find an investment property for a good price.
How Do Hard Money Loans Work?
Hard money loans are interest-only rehab loans from investors with a short repayment period of 12 months. Up to 70% of the after repaired value of the property is the typical loan limit.
For example, if you want to purchase a house that costs $100,000 and it’s after repaired value is $200,000. You can get a hard money loan for $140,000, which is 70% of $200,000. You will have monthly interest-only payments until you’re able to flip the property and pay off the loan.
Hard Money Loan Pros
- Low credit scores approved
- Quick closing
- Get up to 70% APR
- Easier to qualify for than traditional loans
Hard Money Loan Cons
- High-interest rates
- Short-term financing only
- High interest-only payments
- High closing and origination fees
Why Do People Use Hard Money Loans?
Unlike conventional financing, they close quickly, requiring lots of paperwork to document and validate your income and assets to qualify for a mortgage loan. Hard money lenders are not concerned about this.
The loan is tied to the property itself so that these loans can close much quicker. This is especially important for real estate investors in hot markets where homes are sold very quickly.
They’re easy to qualify for – Most hard money lenders do not scrutinize borrowers’ credit scores and income. This makes them easier to qualify for, especially borrowers with bad credit or self-employment income hard to document.
Who are Hard Money Loans For
Hard money loans are best for real estate investors who flip homes quickly. They either don’t have the cash to purchase properties or don’t want to tie up their own money in their deals. These loans close more quickly than traditional financing, which is very important in a hot buyer market.