Those who have poor credit, real estate investors and anyone who needs a bridge loan while going from one property to the next often use hard money loans to help them finance. Hard money loans for bad credit and hard money real estate loans both offer money to help out in the short term. These loans are issued by an investment firm instead of a commercial lender, and hard money loan requirements often ask for an equity amount that is greater than that of commercial loans. Even so, the criteria for borrowing are much easier to achieve.
Who are hard money borrowers?
Those who borrow hard money come to the lender with different needs. Investors look for money in the short term in order to renovate or purchase an investment property. Those with bad credit who still have a good amount of equity in their properties are able to borrow for a short while until they are able to qualify for refinancing. A homeowner might need a loan in order to buy a new house if their current house hasn’t yet sold. All of them use someone else’s cash to reach their goals, leaving their own money alone. Hard money lenders are usually individuals or a company but not a bank.
Offers Made
A seller that is considering lending a hard money loan will need verification of the borrower’s funds. This includes proof in the form of bank statements that there is money in the bank and has been for some time. The offer must also be mentioned in the financing section of the purchase contract and will need to supply a pre-approval letter from the lender.
Financing Contingency
A hard money loan may be subject to a financing contingency. Beyond that, an appraisal will be conducted to make sure the property is worth the amount of the loan. Though a hard money lender will ask for a large down payment, the lender still has to verify both the property’s existence as well as its value. On the other hand, an all-cash offer for a house does not require an appraisal unless the buyer has requested it. Still, an appraisal won’t have any effect on the sale unless the buyer has noted in the contract that the property has to appraised either above or exactly at the purchase price.
Borrowing Costs
Hard money loans are usually issued with rates that are lower than commercial loans. The terms are usually a mere few months to a number of years, though they are usually not that long term. The fees are larger than ones charged by a commercial lender.
What is a hard money loan?
Below, we will detail the difference between hard money loans and all-cash methods.
All-Cash Deals
An all-cash deal will close without a financing contingency or a loan. In this sort of deal, the buyer will either provide their funds using a wire transfer or submit a cashier’s check before closing.
All-Cash Offers
Even though a deal is all cash, it doesn’t mean that the buyer will be using their own funds. Though they may not be seeking a conventional mortgage, they could still be borrowing that money to make the transaction go through. A buyer is able to get a line of credit, take a loan on another property or borrow from a retirement fund to make an all-cash offer.
Hard Money
A hard money lender makes mortgages that are directly related to the value of the asset itself. These types of loans usually have high fees and rates. A lot of hard money loans involve small loan to value ratios, which requires the buyer to put more money down than they otherwise might with a bank loan. Even so, a hard money loan makes it relatively simple to qualify, and they close quickly.
Proof of Funds
A buyer that uses a traditional bank financing method can send in a proof of funds letter. This is a document from a bank that certifies that the funds are there to make the transaction.
Buyer vs. Seller
An all-cash offer means the buyer ties up their money in the transaction, and while borrowing money through non-conventional methods helps the borrower keep their funds, they’ll still have to make payments. The seller has different concerns; if the seller doesn’t get paid, the sale won’t be possible. With an all-cash deal, the seller can be sure that the deal has funds backing it using money that the buyer definitely has.
