Thinking about buying a house but don’t have all the requirements needed to get a loan from a bank?
Maybe you’re in a position where you have some money saved, even $100,000 in a savings account, but don’t have the income or the credit score required to buy a house, don’t be discourage, you can still make it happen. On the contrary, maybe you don’t have any savings or enough to cover the down payment and closing costs. This when it enters to the picture a hard money loan.
What is hard money?
The first thing to know about a hard money loan is that is provided by an individual or company, not a bank.
A hard money loan is secured by a Real Estate property, that can be taken away in case you default. It is a short time loan, and it is commonly used as a quick way to get money, at a higher cost and lower loan-to-value ratio.
How a hard money loan works?
The terms on hard money can be negotiated between the borrower and the lender, but this are mainly based on the property being used as collateral, instead of the qualifications of the borrower to get a credit.
These types of loans are meant to be paid in a short time of period (1 year). Hard money loans are commonly sought by Real Estate investors, who plan to renovate and resell the property quickly and pay off the loan as fast as in a year or sooner.
And the costs?
The interest rate of a hard money loan is considerably higher than a credit provided from a bank, between 9% and 12%, depending on the investor and lender. Additionally, if you take up on a hard money loan, you’ll probably will have to cover a setup fee.
What about the amount of the loan?
The amount of the loan is based on the property’s value, not the selling price. Let’s have a look at it:
Let’s imagine you have $100,000 in a savings account, but no good credit score.
You have enough to cover the down payment, the setup fee and other closing costs, so you go ahead and get a hard money loan.
If you want to buy a house of approximately $200,000 value, but the property is selling for $150,000. A hard money lender will provide you with an approximate of 70% – 80% of the amount of the property’s value. With this, you get a loan between $140,000 and $160,000, giving you a plus to make renovations if that’s the case.
If you need guidance and information on how to get a hard money loan or the benefits of it when it comes to investments, contact me now, we can help you make the right choice.