Hard Money Loan Definition & Types?

1. What is a hard money loan?

A hard money loan is a real estate loan, usually given on a short-term basis (6 – 24 months), made without verifying the borrower’s income or credit. They are also referred to as “Private Money Loans” where the borrower pledges real property (usually residential) as security for their loan. Most of these types of loans do not require a high credit score, and they also do not require full documentation of source of income.

Hard Money Loans are usually given to borrowers who have good equity in their home or property but lack the income or credit scores required by traditional lenders such as banks and mortgage companies. They are considered “high-risk” loans because there is no guarantee on the part of the lender that the borrower will pay back all or a portion of what is owed.

2. Types of Hard Money Loans?

There are four main types of hard money loans:

1) Short-term fix and flip loan:

Fix and Flip loans are made for borrowers who need cash to renovate or repair a property in order to sell it quickly, often within 30 days. These loans are typically repaid when the borrower sells the property.

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2) Short-term purchase money loan:

Purchase Money Loans are made to borrowers who need cash in order to buy a property quickly. These loans may be for the full amount of the purchase price or for a portion of the purchase price with an agreement that the borrower will pay off any remaining balance upon completion and sale of the property.

3) Short-term bridge loan:

Bridge Loans are designed to allow borrowers time to refinance an existing or mature loan. Repayment of Bridge Loans is usually made when the borrower obtains financing for the project, such as a commercial loan.

4) Long-term affordable housing loan:

Affordable Housing Loans are for borrowers who need money to construct or rehabilitate a property that will be rented or sold at below-market rates. These loans may be made as full construction loans or as rehabilitation loans, which require the repayment of a portion of the loan upon completion and sale of the property.

3. Benefits of getting a hard money loan?

There are many benefits of getting a hard money loan:

1) Lenders do not verify borrowers’ income or credit.

2) Typically require lower interest rates than traditional financing such as a mortgage loan.

4. Drawbacks of getting a hard money loan?

There are many drawbacks of getting a hard money loan:

1) High fees and expenses, which can total up to 15% of the loan amount.

2) High risk of loss for the lender due to the borrower’s lack of credit or income history.

5. Who offers hard money loans?

Hard money loans are offered by individuals and private companies who understand and like real estate projects and making deals. They like making high rate returns on their money while helping out the individual who needs quick financing.

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