There is a lot of confusion and very little transparency when it comes to hard money loans. Most of the borrowers are unclear about the minimum requirements to qualify for a loan. They are also uncertain about the required credit score, funding times, application process, interest rates and fees, as well as the amount and period of the loan.
This blog will decipher all the complexities surrounding hard money loan programs and provide answers to questions that are troubling borrowers. It will also explain the advantages of hard money loans and how to make the most out of it if you qualify for one.
Let’s dive in.
What is a hard money loan?
A hard money loan, sometimes called private money loans or bridge loans, are short-term equity-based loans for investors who want to purchase or renovate properties. As opposed to banks and credit unions, hard money loans are funded by private investors for borrowers who need to finance their fix and flip projects. The fix and flip concept involves purchasing a property, fixing it up, and then selling it at a profit.
Due to the nature of private loans, they usually have short repayment terms, typically 12 to 24 months, which can be extended to 36 months or more. Bridge loans can be secured for all types of real estate properties, including commercial, industrial, construction, and family residential houses.
How do bridge loans work?
Similar to traditional loans, private loans have an underwriting process. Since the lender’s decision is based on the real estate, the process ends much quicker, and the loan gets approved within days. Although showing financial responsibility can help secure better offers, these loans are mainly sought by people who:
- Have a bad credit
- Do not have a lucrative job
- Can’t verify their income
The lender’s money is protected by the property rather than the borrowers’ finances, so if they fail to repay the loan, the lender can sell the real estate which is worth more than the amount of loan.
What is the total loan amount?
The value of the hard money loan primarily depends upon the value of the property to make the loan credible. Investors who secure the loan can use property they already own as collateral or the property they are acquiring as a ‘security instrument’ in the loan. So, in case a borrower defaults, the lender can foreclose on the property.
Most of the lenders will mitigate their losses by making loans based primarily on the real estate asset. This means that even if the traditional financial institutions reject your loan application, you can still qualify for a hard money loan.
What is the minimum credit score (FICO) requirement?
Hard money loans are the non-traditional mortgages where the credit score is not a very significant factor. If the loan is for commercial property that is well-positioned in the market, some lenders might not even consider the credit score requirement.
However, a good FICO score can certainly turn the tides in your favor. If you have a credit score in the 650s or even barely above 600, you can qualify for a hard money loan at a much lower rate compared to what you would get at 500 or sub-500 credit scores.
In short, you can get hard money loans (albeit at insanely higher interest rates) even with lower credit score if your property has enough equity.
Other requirements:
As stated earlier, hard money loans will depend mainly on the property that serves as collateral. However, the ultimate decision will finally rest with the lender and your financial circumstances. Other factors or requirements for the loan include:
Type of property: Certain property types such as commercial buildings or senior living centers in prime locations can easily qualify for hard money loans. However, this definitely varies from property to property.
Borrower’s experience: The fate of your hard money loan application will also depend on your experience. If you’re a seasoned investor with a history of flipping homes, you may get a loan at a much lower rate. Generally, the more experience you have, the better offers you will receive.
Borrower’s location: Lenders tend to fund local investors or those who reside in certain states. For instance, if you are living in the Alamo Heights or somewhere around the Bexar county, then private money lenders San Antonio TX is one of the suitable places to get your desired loan.
The bottom line:
After reading this article, you are now, hopefully, aware of the qualifications, rates, and credit score requirements of a hard money loan. Even though these loans can be closed pretty quickly, it is crucial to have an exit strategy because short-term loans won’t do you much good if you don’t have an end in mind.