Sometimes it can be difficult to secure a loan if you have an unusual credit history or financial background. Using your real estate as collateral via the hard money financing model can be an excellent way to free up some funding so you can pursue your next big dream, settle other crucial debts, or just take care of business.
Are you interested to hear more? Let’s dive in.
What are Hard Money Loans?
A hard money loan is a financing type based on the value of a borrower’s real estate asset. It is often a last resort type of financing facilitated by individuals or independent business establishments, rather than banks.
People who apply for this kind of financing typically have a poor credit history or none whatsoever. This means they do not meet the criteria to qualify for more conventional finance options. These clients may not be able to provide the proper income verification, or they may be undergoing foreclosure or bankruptcy processes.
These options are often taken out by people who also have time constraints. This can be due to needing to close on a transaction, meet a mortgage obligation, or any other important, pressurized circumstance requiring funds.
Hard money loans are offered as short-term or temporary financing solutions so that the borrower can restore their financial situation to normalcy. They’re usually short-term. This is because investors do not, as a rule, intend to hold onto the property that is being used as collateral.
Repayment periods last between 3 and 36 months, depending on individual circumstances – speak to your lender to set up a repayment schedule that suits you.
Because there is more risk in lending to these types of applicants, interest rates are usually a bit higher on this type of financing. Rates are generally calculated as a maximum of 65% of a property’s current market value or the original purchase price.
Who is Eligible for a Hard Money Loan?
People with complicated credit backgrounds are usually hard money loan applicants, but anyone who meets the basic requirements can apply for one. The critical requirement is for the applicant to have a minimum down payment amount or, more usually, to have equity in a property that may be used as collateral.
Typically, the minimum amount is 30 to 40% for commercial real estate and 25 to 30% for residential properties.
Who Does Not Qualify for Hard Money Loans?
The main requirements of most lenders are that a borrower must be able to meet down payment or collateral stipulations. You may not qualify for a loan if you do not meet an individual lender’s minimum requirements.
As these bridge-over loans are designed to assist people in financial difficulty, the requirements are often negotiable. Be sure to have a chat with your selected lender to establish the most favorable arrangement for both of you.
How Do You Apply for a Hard Money Loan?
First, you will need to find a reputable hard money loan lender to explore your options. It’s best and safest to engage the professional services of a registered loan and credit provider to prevent complications.
Finding a Provider
This kind of financing is typically used by smaller lenders and individuals rather than banks. Lenders who find this kind of loan of value often include real estate investors or smaller associations that offer a more personalized service than large banks.
Property specialists find this arrangement appealing because the approval process is uncomplicated, and the loans are often paid back within a year. As these private lenders do not have any set requirements they need to adhere to, terms that are favorable to both the lender and the borrower can be negotiated on an individual basis.
While loan arrangements are individual, lenders will always have some baseline requirements. Lenders will usually look for the following when negotiating with a borrower.
A down payment amount to activate the loan or an appropriate property owned by the borrower may be used as collateral.
The lender will also need to see the financial statements of the borrower. Often, a lender will ask to see three to six months of bank statements. This establishes whether the borrower has sufficient financial reserves to afford the monthly loan repayments.
The more reserves a borrower has, the higher their chance of qualifying for a hard money loan. More reserves will also allow for more reasonable interest rates.
Lenders also prefer to work with people with experience in the property sector. However, novice property owners will still be considered for a loan if they can give the lender hard property and exit strategy details regarding their equity situation.
New borrowers may still incur higher interest rates unless they can make higher down payments of 35 to 40%.
Benefits of This Loan Type
This type of financing is appealing to individuals with varying needs. Here’s how it can help.
Borrowers do not have to have perfect credit or financial histories to be able to take out a loan. So long as property equity and cash reserve stipulations are met, you can qualify.
Straightforward and Fast Processes
Hard money loans have a much shorter approval period than conventional types. The money may be made available within a few days or weeks, depending on the circumstances of your loan.
There are no set rules regarding the terms, so lenders and borrowers can independently establish the terms that work for them.
Some Key Things to Remember About Hard Money Loans
- Hard money loans are primarily applicable for real estate dealings.
- The terms are based on property collateral.
- Financing comes from individuals or private companies, not banks.
- People with poor credit histories are eligible.
- Requirements are minimal and are negotiable.
- Application processes are straightforward and fast.
- Loans are short-term but may have higher interest rates.
- Default can still benefit the lender in terms of being able to collect on the collateral.
Fund Your Next Big Dream by Applying for a Hard Money Loan
We at Associates Home Loan can help you get the funding you need for your next big move. Contact us for a personalized assessment of your eligibility and other hard money loan requirements and details.
You can get in touch with one of our experienced professionals via our contact form or by calling 813-328-3047.