Hard Money Home Loans: What They Are and When to Use One

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A residential hard money loan is a way for borrowers to obtain money for the purchase of a home without resorting to traditional lenders. Hard money loans do not use traditional forms of credit for approval, but instead rely primarily on collateral. Although traditional mortgages also use homes as collateral, hard money loans generally require higher levels of collateral and charge higher rates. But for some borrowers, hard money loans may be the best — or only — option for their financing needs. Here’s a closer look at the features and uses of hard money home loans.

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What is a hard money loan?

If you’re looking for a hard money loan, you probably won’t find one at your local bank or credit union. Hard money loans are considered specialist loans, which means that you will have to go to either a private investor or a company specifically dedicated to hard money loans.

One of the main attractions of a hard money loan is that you can access your money much faster than if you apply for a traditional mortgage. However, part of the reason for this speed is that hard money lenders don’t have to comply with the same list of regulations as traditional lenders. This makes hard money loans inherently riskier for the finance company, which is why they are almost always more expensive for borrowers than traditional financing.

Another important feature of hard money loans is that they generally have much shorter repayment periods than traditional mortgages. You will likely have to pay off your hard money loan in just a few years rather than the 15 or 30 year periods that are more commonly used for residential purposes.

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How to qualify for a hard money loan?

In a way, it’s easier to qualify for a hard money loan than a traditional mortgage. This is because a hard money lender typically does not rely on traditional funding criteria such as credit scores and debt to income ratios. On the contrary, a hard money loan uses collateral as the main basis for approval. In other words, you should expect to put down a large down payment if you’re looking to use hard cash to finance a purchase. This reduces the risk to the lender, as they can liquidate the equity in your home to pay off the loan if you can’t keep up with your payments.

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Who would use a hard money loan?

Hard money home loans are primarily for those who cannot qualify for traditional loans. For example, if your credit score is too low to qualify for a traditional mortgage, or if you have the type of negative financial history that most traditional lenders avoid, a hard money lender might be your only option. . The same is true if your debt ratio is too high for a traditional mortgage. But if you’re determined to buy a home but no traditional bank will give you a mortgage, hard money loans may become more attractive.

Hard money loans are also often used by real estate swimmers, who need money quickly to complete their transactions. Since the idea behind house flipping is to get in and out of the property as quickly as possible, the high interest rate attached to a hard money loan is not as important as the need to get money fast.

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Should you get a hard money loan?

In most cases, financing a residential home purchase through a traditional mortgage is the best choice for most borrowers. Although getting a traditional mortgage takes longer, it almost always results in a longer term, lower interest rate, and more affordable payment structure. But if you can’t qualify for a traditional mortgage, or if you need quick cash to buy a home or another investment opportunity, a hard cash loan might be an option for you.

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Last updated: August 31, 2021

About the Author

After earning a BA in English with a business major from UCLA, John Csiszar worked in the financial services industry as a Registered Representative for 18 years. Along the way, Csiszar earned the Certified Financial Planner and Registered Investment Advisor designations, in addition to being licensed as a life insurance agent, while working for a major Wall Street distribution house. and for his own investment advisory firm. During his tenure as an advisor, Csiszar managed over $100 million in client assets while providing personalized investment plans to hundreds of clients.

James V. Hayes