Table of Contents Hide
Anyone into real estate must have come across the phrase “Hard money loan”. These are loans that are not given by banks but by private individuals or companies. However, hard money loans are usually used for real estate properties. This article will show how does hard money loans work, their calculator, and also hard money loan requirements and bad credit.
Now let us dive into the topic in detail. Shall we?
HARD MONEY LOANS:
A hard money loan is a type of loan that is secured by real property. Hard money loans most times are not what people consider first when trying to get a loan. Hence they are loans of “last resort” or short-term bridge loans. This type of loan is generally what is used in real estate transactions. However, the lenders are usually individuals or companies and not banks.
Nevertheless, fix-and-flip investors are a good example of hard money users: they own a property just long enough to boost the value. Most times they don’t live there permanently. They often sell the property and repay the loan, usually within a year or so. Truly, people use hard money to get into a property and stay there, but won’t you want to refinance as soon as you can get a better loan?
Furthermore, they are short-term lending instruments that real estate developers can use to finance an investment project. Indeed, it is usually a tool for house flippers or real estate experts whose goal is to renovate or develop a property, then sell it for a profit.
How Does Hard Money Loans Work
Hard money loans are essentially short-term loans, not more than one to five years. However, their interest rates are usually higher than they are for bank loans. Hence, no one would like to keep them much longer.
However, the funding time frame is shorter when compared to the traditional financial market. Hence, lenders rely on collateral rather than the financial position of the applicant.
Moreover, getting approval from a traditional lender is a painstakingly slow process. You usually need to get a good credit score and plenty of income. But even with great credit scores, if you have negative items in your credit reports, the process takes even longer.
But you see, hard money takes a totally different approach. As said earlier, they prefer holding on to collateral. Indeed, they actually do no care about your ability to repay their money.
Hard Money Loan Calculator
If this is your first time coming across the phrase “hard money loan calculator”, then you will need to first know how it works. Let us take a brief study of how a hard money loan calculator works.
How Does Hard Money Loan Calculator Works
Indeed, hard money lenders offer short-term money, which is perfect for flipping, but it can be expensive. Therefore, examining the costs is essential. The hard money loan calculator usually shows the potential loan amount. Also, it shows the upfront costs, interest charges, and the total costs of having the loan for a period of time.
Furthermore, the hard money loan calculator will produce a figure. However, it is based on whether the loan is attached to the purchase price or after repair value (ARV). Afterward, the calculator will determine if the borrower needs a down payment and if so, it will estimate that amount. It will also show if there’s a potential for cash is coming to the borrower at closing. Hence, that figure will be provided instead.
Subsequently, points and interest are converted into dollar amounts from the percentages and other related figures you supply. However, total costs, both upfront and ongoing, for using the hard money loan calculator are provided.
Hard Money Loan For Bad Credit
Indeed, hard money lenders are only concerned with the property involved. However, some of them still fall into the prey of bad credit. This is why most of them are rigid when borrowers come for hard money loans. The issue here is, how will the lender avoid bad credit for hard money loan.
Truly, the terms of a hard money loan are driving. Interest rates usually start at 12 percent, while the minimum down payment requirement might be 30 percent. Hard money lenders realize that credit-challenged borrowers have few choices. These lenders aren’t certainly severe at heart. They have to estimate the probability of incurring foreclosure costs when pricing the loan. From the lender’s viewpoint, the business of lending to known credit risks has to be profitable, or they wouldn’t provide the service.
Hard Money Loan Requirements
Getting a hard money loan is not an easy task. However, there are certain requirements needed in obtaining a hard money loan.
The major requirement for getting a hard money loan is having the expected down payment or equity in a particular property to use as collateral for the loan.
The minimum amount often ranges from 25% to 30% for residential properties. However, for commercial properties, it ranges from 30% to 40%.
Nevertheless, a lender can allow a borrower to use multiple properties to secure a single loan. This is what is referred to as “cross-collateralizing.”
Also. a borrower has a better chance of approval with a higher amount of equity or a more significant down payment. Indeed, the more the borrower invest in the property, the lower the risk for the lender.
Total Financial Capacity
Another requirement in obtaining a hard money loan is that the borrower must have the necessary cash reserves to make any holding costs and monthly loan payments. Holding costs are things like HOA payments, taxes, and insurance.
The more the amount of cash reserves that a borrower has, the more likely he can get approval.
However, an applicant without any cash reserves will often find it difficult in obtaining a loan. Though, there are some scenarios where a lender is willing to increase the loan amount and hold back some of the borrower’s funds to cover loan payments and other holding costs.
In such cases, the borrower still gets their loan, but the lender ensures monthly payments aren’t neglected.
Experience in Real Estate
Every hard money lenders want to know if the borrower has experience in the real estate market.
However, a borrower trying to finance his first fixer-upper might have a harder time getting a hard money loan than a real estate expert.
Furthermore, if the borrower has little or no experience, the lender will ask for the details of the project, including an exit strategy for the property. Basically, they will want to know how the borrower plans to repay the loan.
Finally, Hard money loans for bad credit should be taken seriously. These loans are given by private individuals and not traditional financial institution.