What are the terms of a hard money loan?
Updated: Aug 4, 2022
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Hard money loans have terms of 6 to 36 months, while traditional loans are typically amortized over 30 years. Hard money loans usually carry an interest rate that's 4% to 10% higher than traditional loans. Hard money loans are intended for short-term investors, while traditional loans are for owner-occupied properties.
What Types of Deals Should Hard Money Loans Be Used For?
Hard money loans are not appropriate for all deals. When purchasing a primary residence with good credit, income history, and there are no issues such as a short sale or foreclosure, conventional financing through a bank is the best way to go if the borrower still has time to go through the lengthy approval process required by a bank. Hard money is your source of financing when banks are not an option or the loan is needed in a short period of time. Get to know more!
Hard money loans are ideal for situations such as:
Fix and Flips
Land Loans
Construction Loans
When the Buyer has credit issues.
When a real estate investor needs to act quickly.
Pros And Cons Of Hard Money Loans
Pros As we’ve discussed, some of the pros of using a hard money loan include:
Faster approval process
Approval based on property, not credit history
More flexible
Cons Some of the drawbacks of hard money loans include:
High interest rates
Often require large down payments
Shorter terms give you less time to repay
Riskier than traditional financing
May need to have proven track record of successful house flips
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When It Makes Sense To Take Hard Money Loans
Business owners take advantage of hard money loans to access quick capital. It’s often used to aid business transitions, such as renovating commercial property or moving your company to a new location.
Borrowers also use hard money loans to bridge the gap between an investment property purchase and long-term financing. During the short term, they use hard money financing to acquire and renovate the property. Later on, they refinance the loan with a traditional commercial mortgage to pay off the hard money lender.
However, because it does not adhere to traditional processing, hard money loans shorten your funding frame a great deal. This makes it a risky option, most especially to borrowers with limited cash flow and funding sources for repayment.