Are you looking for a little bit of extra cash to take care of your financial hardship or fund your upcoming project? Well, in that case, taking out a loan would definitely be an excellent solution for you.
However, with so many alternatives out there, choosing the right option could be a little challenging. For that, you will have to consider your condition, the amount of money you need, and much more.
For example, if you want to get some money quickly, opting for a hard money loan would be the right idea for you. It can also be an excellent option in case you’re not eligible for other forms of financing.
Nonetheless, before we dig deeper into the rabbit hole, let’s learn more about hard money loans a little more.
An Introduction To Hard Money Loans
A hard money loan, in essence, is a non-conforming, short-term loan, which is not provided by conventional lenders. Instead, you will get them from private organizations and people who accept an asset or property as collateral.
Hard money loans are considered to be the “last resort” for people who’re looking for some quick cash.
Why?
Well, lending your house for money isn’t really the best option available out there. Nevertheless, if your other mortgage applications have been denied already, you won’t have any other choice than to go for hard money loans.
Unlike the conventional loaning procedure, a hard money loan features less-stringent approval processes with faster turn-around times. Besides, you’ll get the money instantly after lending your house as collateral for the mortgage.
How Do Hard Money Loans Work?
With a hard money loan, you don’t really have to prove your “creditworthiness” in any way. However, you’ll still have to consider a few aspects before getting the approval. These are –
- Your home equity
- LTV or loan-to-value (LTV) ratio, and
- DTI or debt-to-income ratio
Aside from this, the lender might ask you to complete other paperwork regarding the insurance of the house and other aspects. Once you get the approval, you will get your money pretty quickly.
Nonetheless, there’s a hitch.
In return for this fast turnaround time, you will have to deal with an expensive origination fee and a higher interest rate. It’s because the lender is taking a huge risk by lending you the money while taking your house as collateral. Thus, the origination fee of the loan will work as a sort of insurance money for them.
How Are The Rates Of Hard Money Loans Set?
In a conventional mortgage procedure, the lender will evaluate your financial background before lending the money. However, it doesn’t happen while processing a hard money loan. In this case, the lender won’t dig into your fiscal situation. Hence, the risk of losing their money will be much higher in this case.
In essence, the interest rate of hard money loans tends to be around two to ten percentage points higher than the conventional ones. As of 2020, the average percentage rate of interest for this form of mortgage is somewhere between 11.25% to 12.5%.
Is Taking A Hard Money Loan Risky?
Opting for a hard money loan isn’t necessarily risky, per se, especially if you’re going through a grave financial hardship. However, it still is not perfect by any means.
Here are some of the aspects you have to consider before taking a hard money loan –
- The overall interest rate would be higher than the traditional mortgaging system.
- Closing costs and origination fees are more expensive.
- Requires a larger down payment.
- Association of foreclosure risk.
All in all, you should only choose this option when you need a short-term loan. This system will be pretty expensive in the long run.
The Bottom Line
Although the traditional mortgaging options are safer, qualifying for them can be pretty challenging, especially if your credit score isn’t “that” good. Therefore, in that case, the hard money loans can be your savior.
Nonetheless, as mentioned before, like anything else, it comes with its own set of pros and cons. Thus, before you take any further steps, make sure to consider everything as closely as possible.
Additionally, we’ll also ask you to opt for a professional lender or organization instead of choosing someone who’s not known in the market.
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