In the real estate industry, there is always a need for fast cash, and sometimes you can not rely on traditional mortgages to finance your plans – that’s where a hard money loan comes in.
Keep reading to discover all the details you need about hard money loans.
What Is a Hard Money Loan?
Hard money is a short-term loan secured by real property and typically offered by nontraditional institutions like investors, investment groups, commercial lenders, or individuals. Hard money lenders usually charge higher interest rates than conventional lenders, but they also provide significantly faster loans. The loans are typically short-term and can be used for any purpose (e.g., purchasing a house or building an addition).
The ‘hard’ part of the hard money comes from the tangible asset used to back the loan. When someone defaults on a secured loan, the lender can take ownership of the property used as the asset to recoup losses.
Hard money loans are often taken up as a last resort, where borrowers take up loans for the short term against collateral. Once they are financially stable, they go back to traditional financing options. It is an excellent option for people with bad credit who have higher chances of rejection. Additionally, this alternative is a great option for new investors with little income history.
Most hard money lenders have their own requirements as they are not subject to most banking regulations. But still, there are a few requirements that are common among most lenders.
The borrower must own property as this loan is based on collateral. You could try calculating the amount lenders are likely to sanction using the loan-to-value (LTV ratio). It is expressed as a percentage and is calculated by dividing the total loan amount and the property value used to back the loan. The LTV ratio also assists lenders in determining the level of risk they are taking with the mortgage.
To address situations where borrowers default and the value of the collateral may not be sufficient to cover the lender’s losses, the lender may request a down payment or a plus fee. The down payment amount may differ depending on factors such as the type of property and the borrower’s project history with the lender.
The debt-to-income (DTI) ratio refers to the ability of the borrower to repay the loan. It is the percentage of the gross monthly income that goes into repaying loans. If the borrower has a lower DTI, it indicates that the debt is lower in relation to the income and that the borrower is appealing. Lenders will generally look for a DTI percentage of less than 36%. When possible, hard money lenders always prefer to work with strong borrowers. The greater the likelihood that the borrower will default on the loan, the higher the risk to the lender.
The hard money lender would also want to know about the borrower’s experience and the project details. The borrower must also communicate a reasonable exit strategy—a plan to repay the loan.
If you want to know more about hard money loans or need one, Hard Money Georgia is just a call away! Just give us some basic information, and we can get started with the process of fast funding. You could also apply online, and we will get back to you soon!