Things To Keep In Mind When Applying For a Hard Money Loan

The word “hard money” can straightaway make you think of hard cash and you are not wrong. Hard money loans can offer you a quick and easy financing solution. They are known as bridge loans and like many other bridge loans, they can help fill a gap in financing.

Such loans are suitable for real estate businesses and have become highly prevalent today. While it does offer quick financing, it is not a suitable option for everyone. Let’s understand what hard money loans are and the things you must keep in mind when applying for one. 

Understanding a hard money loan

A short-term form of borrowing, commercial hard money loans require you to use an asset as collateral to get the funds. They are bridge loans that help finance a property in case you are preparing to sell another one. You can get the loans from private companies or individual investors and most borrowers turn to the loan when their application is denied by a traditional lender.

The hard aspect of the loan refers to the asset which backs the value of your loan and if you default on the loan, the lender will take ownership of the asset. The loan application and approval process is fast and less tedious. 

Things to keep in mind when applying for a loan 

• The property value 

As mentioned above, a hard money loan is a secured loan and requires you to have an asset as collateral. The first step before you apply for a loan is to consider the value of the property for which you want to use the hard money loan. Since the loan will be secured with real property, it could be the space you want to purchase, and you must analyze the value of the property before you apply for the loan. 

• Loan-to-value ratio 

The loan-to-value ratio is a number that is used by lenders to determine the risk they are taking with your loan. It is an important metric and one that should be considered when applying for a hard money loan. The lender will offer a loan based on the percentage of the value of your property. It will reflect the loan amount relative to the property value, and you must understand this ratio so that you are certain that it will be able to cover the amount you require to finance.

• Loan tenure  

Most hard money loans are short-term loans, but they could also have a longer tenure depending on the lender and the loan amount. When applying for the loan, consider the term length and then proceed. The common term lengths for the loans include six months, one year, and two years. 

• Rate of interest 

Irrespective of the type of loan you are applying for, one of the most important factors to consider is the interest rate. If you compare it with the traditional loans, your hard money loan will have a higher interest rate, and you will end up paying more each month. But on the brighter side, the loan does not require you to have good credit. Since it is secured on your property, the lender will pay little attention to the credit score or report. You can easily get access to the funds and apply for it even if you have less than excellent credit. 

• Fees

Always consider the fees when applying for a loan. Besides interest, you will be liable to pay a fee for loan processing. You may have to pay an appraisal charge, an origination fee, or a closing fee. Different lenders have varying fee criteria, and you must be aware of the same before you apply for a loan. 

• Processing time 

When you need funds, the first thing you want to know is the processing time. How long the lender takes to approve your application will determine when you receive funds in your hands. However, hard money loans are quick and easy. It is due to the fast nature of the loans that they remain so popular in the real estate sector. Many business owners prefer the loans over traditional loans due to the fast processing and approval times.  

While hard money loans can be an ideal alternative to traditional loans, they come with a high interest rate and collateral requirement. If you can handle these two, you might want to consider a hard money loan when you need funds and looking to buy a property.

It works like any other loan, but you need to be consistent on your payments because you have secured the funds on your asset and you do not want to risk losing the asset. Timely payments will help build a good credit score and ensure that your assets are secure.