A hard money loan is a type of loan that is secured by real property — meaning the value of the property is used as collateral. These kinds of loans are also considered short-term bridge loans. This means that this method of financing is expected to be used only until a permanent financing option is secured or the short-term debt obligation is repaid.
Unlike traditional financing, the terms of a hard money loan are based primarily on the value of the property being used as collateral rather than the borrower’s creditworthiness. This opens the door for a lot of buyers who may have less than perfect credit but still want to be able to purchase or get cash out of residential or commercial property.
Hard money loans offer a less stringent approval process so funding loans can be quicker than what a borrower might find at a bank or other traditional lender.
The Difference Between a Hard Money Loan and Conventional Loan
If you’re planning on obtaining a property, you’ve likely heard of a conventional loan as a common means of financing. But hard money loans can be a great option to fund your real estate purchase. Here are a few differences between the two financing options.
Hard Money Loans
- A hard money loan is considered an asset-based loan because the underwriting is primarily based on the value of the property
- These loans generally come from private lenders
- Hard money loans are usually done for business purposes, such as investing in commercial or residential property to rent or resell
Conventional Loans
- A conventional loan conforms to Fannie Mae and Freddie Mac guidelines
- This type of loan will be based on your credit score, as well as income
- Obtaining a conventional loan can be a slow process. Individuals should plan on at least 60 days between the time of application and funding
Benefits of Hard Money Loans
A hard money loan can make it easier for someone to purchase or refinance real estate property. If you’re interested in a hard money loan, read on to learn about some of the advantages.
Quick Processing
Most individuals that are looking to purchase a property need money quickly. Hard money loans have faster processing times when compared to bank loans or other traditional means of financing. In fact, qualifying for a hard money loan can be as quick as a few hours, and you may even be able to get the money you need within days.
With a hard money loan, lenders aren’t looking at bank statements or verifying income. This simplified process cuts down a lot of time and makes it easier for you to get the money in your hands as quickly as possible.
Ease of Borrower Requirements
Another advantage of hard money loans is the ease qualification. Lenders will focus on collateral rather than your current financial position. This not only aids in a quick approval period but makes it more likely to get the financing you need. Hard money loans do not require stringent guidelines like traditional loans since lenders are more concerned with the value of the property.
A lender will require borrowers to have strong enough cash reserves to make monthly payments and pay for holding costs. Holding costs can include things like insurance, taxes, and HOA payments. In addition, a lender will want to ensure you have an adequate down payment — with the minimum generally being between 25 to 30 percent of the purchase price.
Getting the financing you need is an important step in successfully obtaining real estate. If you’re looking to purchase your next property, consider a hard money loan for your needs. If you’re ready to get financed for your next property, visit benworthcapital.com.
Not all hard money loans need to be backed by real estate, but Benworth’s loans require that real estate be used as collateral to secure the loan. We accept all credit scores, provide 24-hour approval, and a fast closing period. Learn more about how we can help you with your real estate venture today.
Equal Housing Lender.