Hard Money Loan Definition And Examples

Hard Money Loans:

There is an array of funding options when purchasing real estate. The most recognized financing option and method is the mortgage. Mortgages are secured long-term loans with relatively low-interest rates. Another financing option is a hard money loan. A Indianapolis hard money loan, like a mortgage, is asset secured, but the lending is asset driven and not borrower driven. A hard money lender looks at the value of the asset backing loan and not the credit history and attributes of the borrower.

In Indianapolis Hard money loans may be obtainable when other traditional loans may not be obtainable. These situations included a low credit score, a need for fast money, or a high debt-to-income ratio. A hard money lender factors the value of the asset over and above the borrower’s ability to repay. This means underwriting and other procedural nuances are not typically followed in hard money lending. For an individual needing fast approval, hard money lending may be their best avenue.

Investment property is also an area in which hard money loans are used. In Indianapolis hard money loans allow short-term financing to enable quick capital improvements to a property to resale for a profit. Hard money loans typically last one-to-five years. These short-term loans are more fitting to fix and flip style of investment property. A fast turn around on real property projects lowers the risk of a decrease in real estate value and can increase profit in a fast-rising market.

Another advantage of hard money loans is volume. Hard money lenders can leverage a pool of investment capital from multiple investors. This means a lender can fund many loans at once. Since the borrowers are not the focus of the lending, the borrower may also receive multiple hard money loans.

Downsides:

There are downsides to hard money loans. One being cost. The interest rate of a hard money loan is typically much higher and can be between 10%-15%. Hard money loans are not available for owner-occupied real property. Hard money lenders lend on their terms. These terms may vary from lender to lender. The risk associated with the loan is heavier on the borrower than the lender. Much of this risk can be mitigated by proper financial and project planning.

Example:

An excellent example of a hard money loan is the type of fix and flips seen on most home improvement televisions shows. A contractor or project manager finds a property they deem ideal for flipping. They then reach out to private investors. These investors look at the project in light of the value of the asset, both pre-renovation and post-renovation. If the investor sees the project as a worthy investment, a hard money loan is made.

The borrower, either through their funds or separate investments, makes improvements to the property. These improvements increase the value of the property. While the improvements on the property are made, the contractor makes payments in accordance with the terms of the loan. If during the project, the lender fails to meet the terms of the loan, the lender can take the property. This means the lender can take the property with the improvements and not have to repay the value of the improvement to the borrower.

If the borrower complies with the terms of the loan, the property becomes unencumbered by the loan. The borrower can then sell the property at the increased price, making a profit. The lender regains the purchase money, plus interest and fees.

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