When looking for a loan for an investment property, an investor has the option of going to a bank or a hard money lender. A hard money loan, also called a private money loan, is an alternative to the traditional bank loan. A hard money loan is just a short term loan secured by real estate.
Why is a Hard Money Loan different from a Traditional Bank Loan?
This type of loan is different from a traditional bank loan because it is funded by private investors. A bank loan is funded by conventional lenders like a credit union or bank. Terms of the loan are shorter than a traditional loan. For instance, an investor must repay the private investors in about 12 months, or 1 year. Sometimes the loan can be for two or five years, but no longer than that.
Another difference is the money payments. A hard money loan has monthly payments that include principal and interest or only interest. The balloon payment will occur at the end of the loan term.
This Loan is Based on the Property’s Value
Property value is more important in this type of loan than a bank loan. For example, a lender bases whether they give a hard money to an investor on property value, not credit. This means most lenders do not focus on the investor’s ability to borrow the money. It is important to note, that some private lenders will take the investor’s credit into consideration.
The amount of a hard money loan will vary based on the value of the property that is the subject to the loan. The advantage of this is an investor who cannot get a bank loan because of a short sale or foreclose, will be able to get a hard money loan.
Why Use Hard Money Loans for Investment Property?
Hard money loans are not great for every type of property deal. For instance, a person buying a primary residence and has no credit blemishes and enough income history should not go for a hard money loan. Instead, they should seek traditional financing from a bank lender.
Private lender loans are for situations such as: Real estate investor who needs money quickly to purchase property, Land loans, Any buyer with credit problems such as lack of income history, foreclosure or short sale, Construction loans.
The Interest Rate for a Hard Money Loan Varies
It is important to pick the right private money lender for a hard money loan. Each lender will charge different interest points and rates. Another thing to consider about these types of loans is that private money lenders are taking a risk on investors the traditional lenders will not. This means the interest rates will be higher than the conventional bank loans. The interest rates many from 10 to 15 percent higher than a bank loan.
Understanding a Hard Money Loans
Investing in property no longer requires a perfect credit history. People can obtain a hard money loan. This loan is an alternative to a traditional bank loan.