Hard money loans describe loans that are made by private investors. They are based mostly upon the value of the property that they are used to buy, so an applicant’s credit score doesn’t factor much into the calculation. However, the investors expect to earn good returns, so the interest rate is likely to be much higher than a regular mortgage property loan from a bank would be.
When Are Hard Money Loans Viable Options?
Even though hard money loans are more expensive than traditional loans, there may be compelling reasons to use them. For one thing, hard money lenders are likely to lend money when other lenders say no. This makes them very handy tools for some property buyers.
However, it’s important to note that these are usually short-term loans. In fact, they are sometimes called bridge loans. This is because they are only intended to “bridge” the gap until a buyer can obtain investment money or regular financing.
In any case, there are certain situations when these private loans make sense:
* A home buyer needs to purchase a new home before they can sell their old one: In some cases, regular lenders won’t approve a second mortgage before the first one is paid off. A hard money loan can help buy the second home and buy time until the first home gets sold.
* A business owner needs to obtain property: In some cases, business owners need to act quickly in order to buy a property. The owner can’t wait for investors or traditional financing because he or she needs to start doing business. The bridge loan can enable the owner to buy a property right away.
Why Will Hard Money Lenders Loan Money in Risky Situations?
These private lenders consider the value of the property. They usually won’t lend the full value but expect the buyer to take some stake. If the buyer defaults on the loan, the lender, such as a Phoenix hard money lender simply takes over the property and sells it to get their money back. While this kind of loan might be useful, it can also be risky.
On the other hand, it might be risky for buyers to let a chance to buy a property get away. In cases like this, it might be the right choice to go ahead and get the quick loan, get the property, and then work on obtaining cheaper financing later. In some cases, the risk is worth it.
Hard Money Loans Can Be Fast
One of the best things about obtaining a private loan is that decisions can be made very fast. While a bank or mortgage company will take weeks or even months to approve a large loan, a hard money lender is likely to approve within days.
This is because they don’t need to qualify buyers like mortgage lenders do. They may do some work to qualify buyers. However, since they are lending upon the property value, they are more interested in valuing the property.