Hard Money Mortgage Loans
There are many situations where a Hard Money Mortgage Loan maybe the best option for a person looking to borrower money. Hard Money Mortgage Loans are for a person that would not want to go through a traditional mortgage lender or may be unable to do so due to employment, income, and other factors. In these cases, a hard money loan may be the way to go.
What is a Hard Money Mortgage Loan?
To put it simply, a hard money mortgage loan is a loan that allows borrowers to get money to buy a home without needing a traditional lender. These loans are funded directly by investors or individuals who have money they are willing to lend you towards the purchase of a property. In general, the property you're purchasing will be used as collateral, which means if you fail to pay back your loan, they will own the property themselves.
If you need a loan fast or if a traditional investor will not approve your application for whatever reason, you can get a hard money loan instead. It just requires you to find the right people who are willing to help you.
How It Works
Generally, lenders look at your credit scores and available income when determining your ability to repay a loan. In turn, this determines whether or not they are willing to lend you money. Most people have no problem going through a mortgage program and proving their eligibility, especially if they have a solid history of repaying loans and they have steady income. Of course, as debt ratios grow higher, income becomes unsteady, and other factors come onto the table, these standard mortgage programs may no longer be an option.
This is when a borrower may choose to approach a hard money lender. This process is also faster because, even with a great credit report, getting approved with a traditional lender is a long and slow process. That's why it generally takes 30 days or more to close on a home purchase, which is in addition to the preapproval process every borrower must go through before making an offer on a home. Bankruptcy and other negative marks on your credit report will make the process take even longer, too.
On the other hand, a hard money mortgage lender is going to lend you money based on the collateral you're using to secure it. This might be the property itself or you may even use a car or other type of asset as collateral to show them that you are serious about paying them back. This is why the value of your collateral matters the most to the lender. Ultimately, it does not matter how good your credit score is. They care about finding a borrower who has valuable collateral that they're willing to back the loan with
Generally, a hard money loan is a short-term loan. Compared to a traditional mortgage that lasts up to 30 years, a hard money loan will only last 6month to five years. However, that doesn't mean you necessarily have to pay off your purchase in that amount of time. Hard money mortgage loans generally have substantially higher interest rates than traditional loans, so most choose to refinance the loan through another program at a lower interest rate within the next few years.
Others plan on fixing up and selling the property for a profit, and then paying off the loan early to avoid accumulated interest. However, that is where a key factor comes into play. You should always read the loan term's in detail to ensure that you will be able to pay the loan off early, without having to pay the lifelong interest of the loan. Some loan terms will calculate the full-term interest when you open it, and make you pay all of that interest whether you pay it off early or in the agreed monthly installments.
Such terms will cost you a significant amount of money, so it's always worth having a legal professional look over any papers on your behalf before you start signing.
Is A Hard Money Mortgage Loan Right for You?
Many people assume that hard money loans are a bad way to go since they generally lead to such a high interest rate. However, they are sometimes to only option for people who need funding right away and cannot get it through a traditional lender. With that said, borrowers should always be mindful of their actual ability to pay back or pay off the loan.
Due to the high interest rate, you should certainly plan to pay off your loan early so that you do not end up racking up thousands or even tens of thousands of dollars in interest charges. You may plan on doing this by selling the home for a profit in the next 6-12 months or by refinancing the loan through another lender. Of course, the latter means that you are expecting your income or credit history to improve to the point where a traditional lender will approve you.
Whatever the case may be, if a hard money mortgage loan is something you are considering, it's worth doing your research into hard money lenders. You'll find them by searching terms like private money lenders and you may even be able to find a local in your community who has the means of loaning you cash. Really, a hard money lender can be anyone willing to give you money in exchange for a certain interest rate and based on certain collateral.
Finding the Right Hard Mortgage Mortgage Loan
Hard money mortgage are generally not the first option for people looking to purchase a property, especially if you are buying a primary or secondary residence that you don't plan on flipping or selling in the near future. If you're unsure about a hard money loan, be sure to check out other means of receiving mortgage financing first--including conventional loans and programs like the FHA and USDA home mortgage loans.
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