Hard money loans are short-term loans that may be used to acquire investment properties despite having poor credit. However, their high-interest rates and short payback terms make them dangerous.
Bridgewell Capital is a hard money lender which provides loans for real state investments.
How does hard money lending work?
Hard money loans, often known as bridge loans, are short-term financial instruments used by real estate developers to fund investment projects. This form of loan is often used by home flippers and real estate developers whose objective is to remodel or develop a property to sell it for a profit. Private lenders rather than traditional financial institutions such as banks make hard money loans.
The capacity to receive hard money funding is not contingent on the borrower’s creditworthiness, unlike regular bank loans. Instead, hard money lenders choose whether to provide a loan based on the property’s worth. Specifically, lenders concentrate on the “after repair value,” or ARV, which is an estimate of the property’s value after the completion of the rehabilitation or construction phase.
Advantages of Hard-Money Loans
Here are three advantages of hard money loans:
• There are fewer hoops to go through since you are dealing with a single lender or a small group of lenders. Hard money lender is not concerned about your credit score or amount of debt. Because the property would serve as collateral for the loan, they are primarily concerned with its perceived worth.
Can Lend More:
• Conventional mortgages need a minimum down payment of 5% of the purchase price. Banks prefer a down payment of 20% of the purchase price, which generally results in better loan conditions. If your down payment is less than 20%, you may be required to acquire mortgage insurance, which may raise your monthly mortgage payment.
Create a Relationship:
• The lender will likely want to collaborate with you in the future if you have a history of adhering to the terms of the contract and making on-time or even early loan repayments. The lender may be ready to lend a larger proportion of the purchase price, decrease the origination cost, or shorten the time required to get the loan.
Top Three Detriments of Hard Money Loans
While the quickness, minimal standards, and adaptability of hard money loans guarantee that real estate investors have access to the funds they need to finish their projects, there are certain features of hard money loans that are less than ideal.
1. The interest rates for hard money loans are higher than those on bank loans
The interest rates for hard money loans will always be greater than those on normal bank loans. The higher interest rate is a result of the greater risk for the lender and the borrower’s need for fast access to funds. Depending on several variables, the interest rates for hard money loans often vary from 9 to 15 percent.
Additionally, hard money lenders impose loan origination fees, often known as points, which are a percentage of the loan amount. Points typically vary from 2 to 4, however, some lenders charge much greater points in certain circumstances.
2. Hard money loans are only for short-term use
Most hard money loans have terms of one to two years. There is a loan duration of 3 to 5 years available, although this is often the maximum term length.
Since it is uncertain where interest rates will be after the loan period, the longer the loan duration, the greater the lender’s risk. If interest rates decline, the borrower has the opportunity to refinance at the new, lower rates. If interest rates rise, the borrower may maintain the loan with the lower rate, but the lender must wait until the loan matures.
While the lender waits for the loan to mature, their investment in the trust deed yields less than what they might earn for fresh investment in a trust deed at current interest rates. This poses a risk to the lender, prompting them to only give shorter periods.
3. Hard money loans need a minimum 25-30 percent down payment or equity
Some borrowers consider the need for a down payment or equity as a hindrance that hinders them from securing a loan. Hard money lenders may overlook several flaws and defects, but only because they want sufficient equity in the property to serve as collateral for the loan.
“Hard money” utilizes the “hard” asset as collateral, while banks generally consider income, a clean credit history, and FICO ratings. With hard money, a lack of a down payment results in the denial of a loan.