If the term “hard money loan” leads you to imagine quick and simple business agreements that result in “cold, hard cash,” you’re probably not that far off the mark. But, just because this sort of loan offers rapid financing doesn’t imply it’s a good, safe alternative for everyone, that is why it is important that you are well-informed when you are planning to get Connecticut hard money loans.
How Is A Hard Money Loan Defined?
A hard money loan is a short-term borrowing made by individuals or private firms who take property or another item as security. Borrowers may seek hard money loans if their applications for loan or mortgage are rejected, or to evade the long process of obtaining a loan through regular channels.
Hard money loans are also secured by the very property for which it is being used, just the same as those loans that are obtained in the conventional ways. When a borrower fails to pay on a secured loan, the creditor may seize the collateral in order to recuperate its losses.
Unlike conventional mortgages or other forms of secured loans, hard money loans have a faster and generally less strict approval procedure, which makes them perfect if you need to close on the acquisition pretty soon.
Who Generally Are Hard Money Lenders
Private investors or organizations that specialize in this sort of lending are often hard money lenders and this is because you will not be able to obtain a hard money loan through your local bank.
Lenders of hard money are not regulated in the same way that regular, conventional loan lenders are. This implies that they are mostly free to set their own standards for credit scores and debt-to-income ratios.
It is possible to secure a loan from a hard money lender even if you have been refused by more regular lenders. The most significant criteria for hard money lenders is not the borrower’s creditworthiness, it is the value of the estate being acquired.
How Hard Money Loans Differ From Conventional Loans
Let us evaluate how hard money loans differ from more typical sources of borrowing.
- Conventional Loan
Albeit not a legally defined term, in this context, “traditional” pertains to loans obtained through a process that almost all people are accustomed to: you apply for a loan, the creditor verifies your credit and then determines your ability to repay, and if your financial affairs meet their criteria, you are approved for the loan.
Numerous loan kinds come under this category, including mortgage loans, vehicle loans, personal loans, and home equity loans. While it is often feasible to obtain these sorts of loans from private lenders who do not have the same standards as traditional lenders, these private loans can be significantly more expensive and less profitable for borrowers due to the significantly increased risk.
Traditional loan creditors will thoroughly examine your financial status, including your earnings, the amount of debt you owe to other creditors, your credit record, your other properties (including cash reserves), as well as the amount of your down payment.
These creditors go through this occasionally lengthy process in order to reduce the risk they face when lending money to a person. Lenders can offer more cheap loans by ensuring their clients are creditworthy.
- Hard Money Loans
A lender qualifies a borrower for a hard money loan depending on the price of the asset being acquired.
The lender may run a brief credit or financial check, but the procedure will be far less thorough than it is with a regular loan which then speeds up the process, allowing borrowers to get their funds in a matter of days rather than weeks or even months.
The disadvantage of this procedure is that the creditor takes on much greater risk, which results in the borrower paying a higher interest rate. Hard money loans are generally associated with high-interest rates, also lenders may request bigger down deposits than is customary (though this is not always the case).
Additionally, hard money loans typically have short repayment terms – frequently as little as a few years. In comparison, conventional mortgages typically have a 15- or 30-year term.
Common Uses of Hard Money Loans
The following are some of the most frequently cited reasons why there are people who are seeking out hard money loans.
House Flipping
Hard money loans are used by property investors who earn money by acquiring low-cost physical properties in need of refurbishment, performing value-adding repairs as well as renovations, and then flipping the properties for a profit.
Due to the brevity of these ventures, professional flippers frequently choose speedier sources of funding. Additionally, since house flippers often attempt to sell the property within a short amount of time – typically just under a year – they do not require a longer loan term as a regular mortgage would.
Investing in Real Estate
Individuals interested in investing in rental property but who do not qualify for conventional financing may consider obtaining a hard money loan to finance their purchase.
This approach may be advantageous for people who are unable to obtain a regular loan owing to their credit record or for those who require more money than a typical lender would lend.
Investing in Commercial Real estate
Likewise, if a company owner is unable to get regular financing, they may utilize a hard money loan to support the acquisition of commercial real estate. Hard money loans might be advantageous for entrepreneurs looking to acquire a unique property that does not fit traditional loans or for individuals who discover that the loan limitations on regular commercial loans are insufficient to meet their demands.
Prevailing Interest Rates on Hard Money Loans
As previously stated, hard money loans are costly. How much do they cost? Let us compare the financing costs on such loans to those on more conventional loans.
The average rate on a 30-year fixed-rate mortgage loan was 3.62 percent in January 2020 which by comparison, hard money loans can have significantly higher interest rates, frequently between 8% and 15%.
Additionally, hard money loans might be more expensive, depending on the lender’s desired loan-to-value (LTV) ratio. If a lender would finance only 70% – 80% (or less) of the property’s worth, you’ll almost certainly be required to bring a sizable down payment to the closing table. If you lack the necessary funds, you may have trouble finding a hard money creditor willing to deal with you.
