What You Need To Know About Private Loans Or Hard Money Loans
Not everyone is familiar with how private lending works. In some ways that’s understandable. If you can qualify for a traditional bank loan, then you don’t need to know much about hard money loans. But if the deal you’re working on has special circumstances that don’t meet the criteria of a traditional bank loan, then knowing how hard money loans work would be very useful.
So here’s a quick primer on private lending, just in case you need it sometime.
What is a hard money loan? A hard money loan is a short-term loan secured by real estate. Private investors, instead of a traditional bank, typically fund these loans. Underwriting standards are based primarily on a borrower’s ability to repay a loan and rely less on credit scores. This makes it possible for borrowers with isolated credit incidents, short-sales or certain bankruptcy conditions to qualify for a loan.
What are some of the advantages of a hard money loan? Decisions can be made very quickly, usually in one day. And funding for these loans can be obtained in a matter of days, so you can close very quickly on a property. This can give buyers a competitive edge.
What types of properties qualify for a hard money loan? Borrowers can get a hard money loan for residential, commercial and income-producing real estate, including commercial, industrial and land.
What kind of down payment do you need?
Typically, a borrower would need to give a down-payment that is equal to about 35% of the property value, that ratio also applies to refinances.
What are the loan terms? Loans are typically for 24 months, so borrowers avoid a long-term commitment. They can also make interest-only payments with a balloon payment at the end of the term. Some lenders charge a penalty for prepaying the loan, but at Benworth we don’t charge a prepayment penalty.
When should you consider a hard money loan? Hard money loans are ideal for situations such as Fix and Flips, land loans and construction loans. This type of loan is also attractive to foreign investors seeking low-documentation loans, borrowers with a credit issues or buyers who need to close quickly. Hard money loans can be funded within days not weeks, as is typical with traditional banks.