Your Guide to Hard Money Loans, Reverse Mortgages and Equity Financing
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What is a Hard Money Loan?
A hard money loan is where a borrow receives money secured by equity in real property and not secure by the borrower’s income or ability to repay the loan. The loan is typically issued by private companies or investors. The term “hard” in hard money means a borrow receives money into their hands and can do what they want with it. Where a traditional loan might be used to purchase a home and doesn’t end up in the borrower’s bank account.
Are Hard Money Loans a good idea?
Hard money loans are a good fit for borrowers who need money quickly and are unable to get funding from a bank. Examples include people with equity in their home who are behind on their payments, financially distressed and need time to get back on their feet. Or an investor who needs funding to fix and flip an investment property. In either case, the loan is collateralized by the property and can be funded by a private lender in days where bank financing might take months. The interest rate on hard money loans is typically higher than bank financing and is the cost for faster money.
How Much do you have to put down on a hard money loan?
In many cases nothing. However it depends on how much equity there is in the property. If the borrow has more than about 35 percent equity in the property, for example, the hard money lender may not require a down payment. In this case the lender may consider the equity as enough buffer to recover the loan in case foreclosure was necessary and to hedge against market price drops.
How hard is it to get a hard money loan?
Hard money loans can be acquired faster than bank financing however still needs pass through the lender’s underwriting process. Different hard money lenders have different criteria. For example some lenders only require enough equity in the property to cover the loan and possibly a little extra to hedge against market price drops.
Can I get a hard money loan if I don’t have income and have bad credit?
Yes. Many hard money lenders only look at how much equity the borrow has in the property and not the income or credit of the borrower. Equity is important because it is the safety mechanism hard money lenders use to recover their loan amount if the borrow stops making payments.
How expensive is a hard money loan?
Hard money loans usually have a higher interest, for example 10% or 12%, than bank financing and are often paid as interest only until the loan is paid off.
Give me an example of a hard money loan
An example is you lost your job and haven’t made mortgage payments to the bank in a while. You need to stop the bank from foreclosing on your home. You take out a $50,000 hard money loan to pay off the bank and buy yourself some time. At 12% interest the hard money loan of $50,000 is $6,000 per year. Or $500 per month. So you pay $500 per month interest (does not go to principal) until you are able to then at some point come up with $50,000 to pay off the loan in full.
What happens if I stop making payments (if I default) on a hard money loan?
You could lose the property. The hard money lender will then likely foreclose on the property to recover the loan amount and any extra equity that come with the property.