How Hard Money Loans Work

How Hard Money Loans Work

When you need money for a real estate transaction but can’t or don’t want to take out a traditional mortgage, one popular option is hard money loans. These allow you to borrow the money from an investor or individual who bases the amount on the value of your collateral. This is less risky for the party loaning the money. If you can’t pay back what you owe, they will sell the property to recoup their losses.

 Reasons To Take Hard Money Loans

There are quite a few reasons why hard money loans are desirable. One is that you generally have between one and five years to pay it back. However, it is important to note that a hard money loan comes with higher interest rates than other types. On the other hand, this type of loan often gets approved much quicker than almost any other type would. The better your relationship is with the lender, the quicker you’re likely to get the money. And in most cases, they will offer you low loan-to-value ratios. This means that they can quickly sell the collateral if you can’t pay the loan back in full.

Another compelling reason to take hard money loans is that you have a lot of flexibility with them. The underwriting process is different from any other type of loan. When you are working with an individual, as opposed to a bank, you have more freedom to negotiate the terms of the repayment.

Short Term Use

In general, hard money loans are considered to be short-term. The vast majority of individuals that use this type of loan choose it because they are flipping houses. Though it is less common to take a hard money loan if you are purchasing a house to live in, you may qualify for one anyway. However, if you do, industry experts recommend refinancing as soon as possible.

Other Considerations

Despite its many benefits, there are downsides to taking a hard money loan. They include the higher cost you’ll encounter. A viable alternative to this type of loan is an FHA 203K loan.

For more information on hard money loans, please contact Diamond Capital Financing.