What Is Hard Money?
In the mortgage industry, hard money refers to a type of financing that is typically provided by private investors or companies, often referred to as hard money lenders. Hard money loans are asset-based loans secured by real estate, and they are known for their shorter terms, faster approval process, and less stringent qualification criteria compared to traditional bank loans. Here's some information on rates, fees, terms, and risks associated with hard money loans:
Rates: Hard money loans typically carry higher interest rates compared to traditional mortgages. The interest rates can range from 7% to 15% or even higher, depending on the lender, borrower's creditworthiness, and the perceived risk associated with the loan.
Fees: Hard money loans often come with higher upfront fees and closing costs compared to traditional loans. These fees can include loan origination fees, underwriting fees, appraisal fees, and various other charges. It's important for borrowers to carefully review the fee structure and factor them into the overall cost of the loan.
Terms: Hard money loans are short-term loans, usually ranging from six months to a few years. They are typically interest-only loans, where the borrower is required to make monthly interest payments and repay the principal amount in a balloon payment at the end of the loan term. Some hard money lenders may offer amortizing options with longer terms, but they are less common.
Loan-to-Value (LTV) Ratio: Hard money lenders focus primarily on the value of the property being used as collateral. The loan-to-value ratio is typically lower than with traditional mortgages, often ranging from 50% to 70% of the property's appraised value. The lower LTV ratio helps protect the lender in case of default by ensuring there is enough equity in the property.
Speed and Flexibility: Hard money loans are known for their quick approval process and funding timeline. Borrowers can often obtain financing within a matter of days or weeks, which can be advantageous in situations where a fast closing is necessary. Hard money lenders are more flexible when it comes to borrower qualifications, including credit scores and income verification, as they primarily focus on the property's value.
Risks: Hard money loans carry higher risks for both borrowers and lenders. For borrowers, the main risk is the higher cost associated with the loan, including the higher interest rates and fees. Additionally, if they fail to make the balloon payment at the end of the term, they may face foreclosure. For lenders, the risk lies in the potential for default, as well as the risk associated with the property's value and market conditions. Lenders mitigate these risks by limiting the loan amount and focusing on collateral.
It's crucial for borrowers considering a hard money loan to carefully evaluate their financial situation, the property's value, and their ability to repay the loan within the specified term. Working with a reputable hard money lender and consulting with a real estate professional or financial advisor can help assess the risks and determine if a hard money loan is the right option.