There are a lot of reasons why a bank mortgage might not be available for you. If you’re buying an even slightly risky investment property, if you already have a high debt-to-income ratio, or if your credit is less than stellar — you might not be able to apply. In fact, even just self-employed business owners can find it difficult to qualify for a traditional loan.
But that’s not the only choice.
What is a Hard Money Loan?
A hard money loan is a loan that’s backed with the value of a property. It’s given by an outside investor rather than a traditional mortgage lender. If the payments aren’t made, then the property is transitioned to the lender. Hard money loans are often shorter in term than traditional mortgage loans. They are used for investments rather than residential properties.
What Are the Advantages of a Hard Money Loan?
If there are so many traditional banking loans out there, why do many people go with a hard money loan, instead? A hard money loan conveys some unique benefits:
You can purchase properties banks won’t touch. A bank doesn’t want a fixer-upper that has a lot of work to be done, but a hard money lender will usually be eager to help.
You can negotiate your terms. Most banks have set terms that they offer everyone based on their credit scores and their financial history. A hard money lender can offer any terms they want.
You can close faster. If you have an investment property that’s hot and you want to close fast, get a hard money lender. They can wire the money quickly and the closing time will be shortened.
You don’t need perfect credit. Your credit and income history aren’t the only things that a hard money lender will consider. They’ll look at your entire plan to determine whether it’s realistic.
At the same time, you have to keep in mind the fact that you’re going to need to pay this loan back within 1 to 3 years.
Should You Get a Hard Money Loan?
If you’re looking for a residential property to live in full time, then a hard money loan isn’t usually the right choice. Rather, hard money loans are used for house flippers who are flipping properties and investors who are chasing a great deal. If you’re going to be able to refinance in 1 to 3 years, however, a hard money loan could still be an option.
Hard money loans are an excellent financial tool when used properly. If you’ve been denied a traditional loan, your next step should be to talk to hard money lenders.