How Does a Hard Money Loan Work?
What Is "Hard Money", and Who Makes These Loans?
By Rick Springthorpe
June 7, 2022
Hard Money Loans
If you're thinking of renovating your home or even starting a construction project in Pittsburgh from scratch, you may be wondering how to finance it. A hard money loan could be the answer! But what is a hard money loan, and how does it work? Keep reading to learn more.
Advantages of a Hard Money Loan
A hard money loan has a number of distinct advantages over a conventional mortgage. Unlike banks, which require borrowers to wait for weeks to months to be approved, hard money lenders can close a loan in as little as five or ten business days. Because of this, private investors should establish relationships with hard money lenders before making an offer on a property. Doing so will increase their chances of closing the deal.
First of all, a hard money lender doesn't require borrowers to have perfect credit and good income history. In contrast, conventional lenders have strict requirements and often don't approve applicants who have no financial history or credit. This makes them less likely to be able to approve borrowers with poor credit or no credit at all. Secondly, hard money lenders require the borrower to have some equity in the property.
Speed of a Hard Money Loan
Another key benefit of a hard money loan is that it's incredibly fast. Many conventional lenders require borrowers to hold onto their properties for three months before they can even apply for a loan. That means a hard money loan will close in a week or even less, depending on your credit, income, and personal history. As you get more deals, you can expect to enjoy even more benefits.
Interest Rates for Hard Money Loans
Interest rates vary based on lender and borrower strength. For example, hard money lenders in Pittsburgh may have lower interest rates than those in other states. This is largely due to increased competition, and this means lower costs for the borrower. However, hard money loans do come with "junk fees."
While qualifying criteria differs, they are generally more stringent than those of traditional banks. Because hard money lenders typically focus on the value of the property, a hard money lender will want to ensure the borrower has a plan of exit if the deal doesn't work out. Because of this, many hard money lenders are willing to work with people with poor credit. The important thing for them to look at is the property itself. They will typically require an appraisal or BPO.
When calculating the amount of down payment needed, the lender will look at the ARV of the property. While this number isn't exact, most lenders will require that the borrower make a down payment of at least 10 percent of the property's appraised value. The lender will typically lend up to 85% of the ARV for the property, and the borrower must make the remaining $10K.
Hard Money Lenders are Private Entities
Private lenders may offer lower interest rates and more flexibility when it comes to negotiating terms. However, a hard money lender will likely have strict criteria and specifications and will not compromise on them. The most important thing to remember is that these private lenders are private individuals and have their own requirements.
Whether you choose a private lender or a hard money lender, make sure to research the lender thoroughly. Then, you can negotiate with the lender to find a deal that works for you.