A hard loan (sometimes known as a hard money loan) is a short-term loan secured by real estate property.
Because private institutions rather than regular banks sponsor hard money loans, they are also known as ‘private money loans.’ Hard money loans focus primarily on the value of a real estate investment property rather than the borrower’s credit score or financial history.
The loan amount is decided by the loan-to-value ratio (LTV), which is the loan amount divided by the value of the collateral property. Even though hard money loans are quicker and simpler to obtain than traditional loans, borrowers must still undergo the underwriting procedure and qualify for particular criteria.
Why Use a Hard Money Loan?
Hard money loans have several benefits over conventional mortgages, such as:
Lower Loan-to-Value Requirements: A hard loan has a low loan-to-value requirement. Generally, the loan-to-value ratio must be 65% or below, whereas conventional loans need a loan-to-value ratio of 80% or below.
No Bankruptcy or Credit Check: Banks only lend to borrowers with good credit scores; however, hard money lenders don’t perform a credit check or consider bankruptcy histories.
Fast Approval Process: Due to the simplicity of the application process, hard money lenders can offer funding in less than a week.
Flexible Terms: Hard money loan terms vary from 3 to 5 years and can be extended up to 10 years if the borrower has a solid real estate history.
However, since hard money loans are usually short-term, the interest rates are usually higher than other loans.
How Does a Hard Money Loan Work?
A hard money loan is a short-term loan secured by real estate property. Suppose a borrower needs short-term cash to complete a real estate project (like purchasing land or property, building or improving a property, or making necessary repairs). In that case, hard money lenders are a good solution.
Here is how a hard money loan works:
- The borrower applies for a loan by filling out an application.
- The lender verifies the borrower to ensure that they are a good candidate for the loan (i.e., income, assets, and credit history).
- Lender reviews and approves a loan package based on the property’s value and the borrower’s credit history.
- The borrower receives the money via wire transfer to their bank account.
- The borrower pays back the money over the allotted period.
This is an example of how a hard money loan works. How long it takes, and its costs will vary depending on the borrower’s financial situation and the lender’s requirements.
What are the Requirements For a Hard Money Loan?
Hard money lenders typically review and evaluate the following when approving a loan:
Proof of funds: Lenders generally want proof that you can pay back a loan before they approve a loan. You may need to provide copies of bank statements and tax returns.
Established credit: A hard money lender looks at a borrower’s credit score and credit history to determine their likelihood of repaying a loan. If you don’t have an established credit history, you may need to get a co-borrower on the loan who does have credit established.
Experience: Hard money lenders often base their loan decision on the borrower’s experience. For example, a real estate investor with several years of experience managing real estate is more likely to receive a loan than a beginner.
Property type: The loan can be used for all real estate types, including single-family homes, multi-family homes, commercial properties, and land.
Property location: Properties can be located anywhere as long as they are available for purchase.
Hard money loans are outstanding for investors who want to quickly fund a project and pay back the loan in a short period. They are also suitable for borrowers with no credit and poor credit who otherwise would not secure a loan.
However, hard money loans are expensive and require collateral in real estate property. If you need a loan to buy real estate and you don’t have the cash, then a hard money loan is a good option.
If you’re looking for reliable Dallas Hard Money Lenders, DFW Investor Lending is your best bet! We have over decades of real estate experience in the Dallas-Fort Worth Metroplex community, providing services that far exceed our client’s expectations. Contact us today!