What To Know About Hard Money Loans

You’re probably familiar with the standard mortgage and refinancing loans. But what about hard money loans? And more importantly, when should you use a hard money loan instead of a conventional loan?

To answer the first question, a hard money loan is based more on a borrower’s hard asset rather than their income and credit score.

A hard asset is a physical item with value like a car– or in this case a house. A borrower must declare a hard asset as collateral to qualify for a hard money loan. This means that if you, the borrower, fail to pay the loan terms set by the lender, then the lender gets to claim your collateral.

In this context, a borrower sets the property they’re purchasing as collateral, and failing to repay the loan means the lender will claim that property as collateral, resulting in the borrower losing the home.

Like with all kinds of loans, hard money loans work best in specific situations and not others. We’ll explore the scenarios where hard money loans are ideal and when a conventional loan makes sense. But before diving into the comparisons, let’s first dive deeper into the characteristics that make hard money loans unique.

Hard Money Loans Explained Further

Like mentioned earlier, hard money loans are unique in that a borrower’s income and credit history doesn’t play as much of a factor as it would for a conventional loan. This means that the approval process takes less time, and that it can be a potential solution for a borrower that couldn’t get approved for a conventional loan (more on that later.)

Another unique trait of a hard money loan is that they are not offered by banks, but only private companies and lenders (Psst… like Dash Home Loans.)

Lenders offering hard money loans follow different standards. Besides requiring a collateral, Here are some important factors that set hard money loans apart.

Higher down payments – For hard money loans, lenders expect a higher down payment, usually starting at 25% and in some cases even higher. This is because lenders won’t lend out the full LTV (loan to value) of the home and that the difference needs to be paid for in down payment.

Shorter payment plans – The standard loan range for a hard money loan is 4-18 months. That is far, far shorter than conventional loans which usually range between 15 and 30 year plans. That means, for hard money loans, it’s imperative that you have a proper plan in place for paying back your loan, because it’ll come at you much faster than the standard loan.

Higher interest rates – A riskier loan usually means higher interest rates, and hard money loans are no exception.

In short, hard money loans give far less leniency for borrowers compared to the conventional loan. This makes hard money loans best for short term house projects rather than long term ones. But what does a short term house project look like?

What Hard Money Loans Are Best For

Hard money loans are best suited for purchasing real estate that you intend to make a profit on, otherwise known as an investment property.

One way this can be done is by using a hard money loan to fund a house flipping project. House flipping is the process of buying, fixing up, and then selling a property to make a profit. This process is meant to be fast, which is why a hard money loan is ideal here. A borrower can use a hard money loan to flip a house and pay off their loan in just a few months.

Another application for a hard money loan is to use it to purchase a property to make passive income on. This is primarily done by buying a property, whether it be a family home in a nice neighborhood or a home in a sought after location like the beach, and renting it out to others in order to generate income. At that time, a hard money loan is usually refinanced into a longer term loan like a conventional loan or a DSCR loan.

A hard money loan here has the advantages. I.e. getting financed quickly in order to secure a location before anyone else has the chance to, using said finances to fix up the property and then finding a suitable buyer, or in this case, renter.

What Hard Money Loans Are Not Best For

Since hard money loans work best for investment property and for people prepared to invest in such projects, it should come as no surprise that hard money loans are not ideal for buying a home you plan to spend years living in. This is especially true for first time home buyers, who benefit most from the lower down payment requirements, lower interest rates, and overall lower monthly bill that come from a conventional loan.

A hard money loan is technically an option for home buyers, specifically if they don’t qualify for a conventional loan, or if they need a large sum of money to close a deal in a competitive market, but it isn’t a great idea to do so.

Hard money loans are inherently riskier for the reasons that make them unique, so a borrower could be putting themselves in a difficult situation by taking on a hard money loan if they don’t have the means to pay it off in a very short time frame. Additionally, some lenders only offer hard money loans for specific purposes (Dash Home Loans only offers hard money loans for investment properties.)

Is A Hard Money Loan Right For You?

So after learning about hard money loans and their uses, maybe investing in investment property has piqued your interest? Is there real estate on your radar that would make the perfect house flipping project or be perfect for generating passive income?

Just like with all things mortgage, Dash Home Loans streamlines the process to make it easier.

During a quick credit and pre-approval background check, just find the house that you need funding for, provide details surrounding the property, construction costs, purchasing information, selling cost, etc. And then Dash Home Loans takes care of the rest.

Because everything’s done in-house, funding can be provided in just a few days, and your mortgage coach will be in touch every step of the way to answer all your questions and keep you updated throughout the process. No annoying middle men needed, just the qualified team at Dash Home Loans.

If you’d like to learn more about loan options for investment properties, or get in touch with a mortgage coach to begin the process, then click here and start today!

*Opinions expressed are solely my own and do not express the views of my employer.

*Pre-approvals are given to clients who have met qualifying approval criteria, and specific loan requirements, at the time of applications. Results may vary.