Hard Money Loans in New York: How Do They Work?
Hard money loans are short-term loans that borrowers can use to purchase investment properties even if they don’t have a good credit rating. They are a great solution when you need quick financing solutions. However, their high interest rates and short term periods make them a bit risky. If you want to get a loan from hard money lenders, you must first understand how the process works. This article will take a look at hard money loans in New York, how they work, and their risks.
Real estate investors turn to hard money loans whenever they need a quick and easy financing solution. While this can be a great option for borrowers who don’t have good credit, it comes with a lot of risk. Anyway, many people still go for it.
What is a hard money loan?
Hard money loans are a type of short-term loan used to purchase durable assets, usually real estate. Rather than using a borrower’s creditworthiness as the basis for approving a loan, hard money lenders assess the merits of an investment a borrower is seeking to fund, then use that investment as collateral.
Hard money loans in New York are not offered by traditional lenders like banks and financial institutions. Instead, they come from individual investors, companies, groups of investors and finance companies.
Individuals and businesses can try to obtain hard money loans to purchase real estate as part of a larger investment. Amateur or professional palmists may want to obtain a hard money loan to finance their home flipping project, or they may be looking to purchase and repair rental property, build or purchase a new property for business purposes.
What makes hard money loans different from traditional mortgages?
There are many ways hard money loans differ from traditional mortgages, including how they are typically used. Hard money loans are primarily used for the purchase of investment properties, rather than housing.
As with other types of loans, the requirements for securing hard money can vary depending on the lender and the terms of the loan. But in general, all hard money loans share a few similarities, regardless of where you get them. These are:
- Quick funding – you can get a hard money loan in days or weeks, unlike traditional mortgages which can take at least 30-60 days.
- Short term loan – all hard money loans have short repayment periods, the shortest being 6 months and the longest being two years. Traditional mortgages, by comparison, typically have repayment periods of 15 to 30 years.
- High interest rates – Hard money loans may have faster processing times, but this means their interest rates are higher than traditional mortgages. Interest rates can range from 8% to 15%, which is much higher than what most people pay for their mortgages.
- Interest only payments -With hard money loans in New York, you can only make interest payments first or defer hard money loan payments. With a traditional mortgage, you typically start paying principal and interest immediately.
- Less attention to credit score –when you apply for a loan from traditional banking institutions, they usually focus on your credit score. Money lenders may ask to see your credit score, proof of income, and your experience with real estate investments, but they’re mostly concerned with the value of the property you’re considering buying.
- Big down payment -with hard money loans, you will need to pay at least 20% to 35% down payment depending on the current price/value of the property or its after repair value (ARV). Traditional mortgages, on the other hand, often require a down payment of at least 3.5% to 5%, and some not at all.
- Costs and expenses – Hard money loans and traditional mortgages have closing costs ranging from 2% to 5%. These fees can cover different types of expenses. Traditional and hard loans also impose penalties if you pay off your loan early, but hard loans usually have lower fees or shorter penalty periods.
What are the risks involved when you take out a hard money loan?
A cash loan may seem like a quick and easy way for you to start investing in real estate. But their high interest rates and short repayment periods can present a lot of risk to borrowers.
For example, you could make interest-only payments first and then have to repay the entire loan at the end of a 12-month period. But if you’re buying a house to flip and you encounter several delays and problems during repairs or you can’t find a buyer, you may not be able to repay the loan on time.
Some hard money lenders will simply let you pay an extension fee to extend your loan repayment period, but the additional fees and interest could outweigh your returns. In the event that you fail to repay the loan, the lender may foreclose on the property.
Do you have other options?
In addition to applying for hard money loans in New York, there are other ways borrowers can finance investment property, including:
- A second mortgage – homeowners may qualify for a home equity line of credit (HELOC) or a home equity loan. The interest rate may be much lower than what you pay with a hard money loan, but your current home will also be used as collateral.
- Government-backed loan programs – you can check out government-backed loan programs from the US Federal Housing Administration (FHA) and the Department of Veterans Affairs (VA), if you’re considering buying a property and don’t mind live in a multi-dwelling area. There are also loan programs offered by the Small Business Administration (SBA) for small business owners looking to purchase commercial property.
- Borrow from family and friends – another way for you to raise funds is to borrow from friends, family members or acquaintances who are willing to finance your project. Although your friends and family may agree to favorable loan terms, you need to be clear about the type of risks involved. Also consider how the loan may affect your relationship with family and friends.