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Published Nov 12, 21
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However, you wouldn't want to keep one of these loans for an extended period because interest rates for hard money are typically relatively high. For instance, the average interest rate for hard money loans in 2020 was 11. 25%. Do I Need a Hard Money Loan? Hard money may be appropriate if you can't get traditional funding for your real estate purchase.

The hard money lender isn't likely to spend as much time as traditional lenders examining your application (although they still want to make sure you'll repay them). For example, they may not spend as much time verifying your income sources or reviewing your bank statement. Once you've established a relationship with a lender, additional funding processes can move quickly, giving you the ability to close deals that others can’t.

If you can qualify for other forms of financing, you might come out ahead with traditional loans. For example, FHA loans allow you to borrow with less-than-perfect credit, have low down payment requirements, and may have lower rates than a hard money loan. Hard money agreements might be more flexible than traditional loan agreements.

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The most important factor for hard money lenders is the collateral that secures the loan. Since the property acts as a guarantee, it becomes easier to get approved for an investment property. You also might be borrowing money from someone willing to work with you directly—not a global institution with strict policies.

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While it seems simple—an asset secures the loan, so all parties are safe—hard money has its drawbacks, too. A primary drawback of hard money might be the extra costs you incur. This is an expensive method of borrowing. Interest rates are relatively high, and you may need to pay closing costs or other fees to get funding.

What It Means for Individual Investors While approval can be quick and easy, most hard money lenders keep loan-to-value ratios (LTV ratios, or the ratio of the loan value to the value of the home) relatively low. The maximum LTV ratio tends to fall between 65% and 75%, so you'll need assets to qualify for hard money.

Why Choose Hard Money Loans Over Conventional Lending?

Hard money loans make the most sense for short-term loans. Fix-and-flip investors are an excellent example of hard money users: They own a property just long enough to improve it, increase the property value, and sell it as soon as they can. Hard money borrowers might hope to sell a property and repay the loan within a year or so.

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You could, but you'd want to refinance as soon as you can get a loan with lower rates and a longer loan term. How to Get a Hard Money Loan To find a hard money loan, you’ll need to contact institutions specializing in this type of transaction. Quick internet searches for hard money lenders can generally reveal several lenders in your area.

Reach out to several lenders, discuss your needs, and develop a relationship so that you can fund projects quickly and easily when you need to. It helps to shop around since hard money loans are less regulated. You might be able to find lower rates or be able to negotiate different terms with different lenders.

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The rates for these loans are generally higher, and the terms are much shorter than traditional loans. The asset you're taking the loan out for becomes the collateral for the loan, so the lender's risk is reduced.

Let’s take a look at how hard money loans work compared to more traditional forms of financing. Traditional Loan Though not a formally defined category, in this context “traditional” refers to loans that are taken out through a process most people are familiar with: you apply for a loan, the lender checks your credit and ensures you have the ability to repay them and, if they determine that your finances meet their standards, you’re approved for the loan.

Though it’s usually possible to get these types of loans from private lenders that don’t have the same requirements that traditional lenders do, these private loans can be more expensive and less advantageous for borrowers because the risk is much higher. Traditional loan lenders will take a thorough look at your entire financial situation, including your income, the amount of debt you currently owe to other lenders, your credit history, your other assets (including cash reserves) and the size of your down payment.

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The downside of this process is that the lender takes on significantly more risk, which translates to a more expensive loan for the borrower. Hard money loans typically come with high interest rates, and lenders might require larger-than-average down payments (though this isn’t always the case). Hard money loans also tend to have short repayment periods – often just a few years.