Hard money loans are short-term loans borrowers can use to purchase investment properties even if they don’t have a good credit score. They are a great solution when you need quick financing solutions. However, their high interest rates and short term periods make them a bit risky. If you’re interested in securing a loan from hard money lenders, you’ll need to understand how the process works first. This article will look into hard money loans New York, how they work, and their risks.
Real estate investors turn to hard money loans whenever they need a quick and easy solution for financing. Although this can be a great option for borrowers that don’t have good credit, there is a lot of risk that comes with it. Regardless, many people still opt for it.
What is a Hard Money Loan?
Hard money loans are a type of short-term loans that’s used for purchasing hard assets—usually real estate. Rather than using a borrower’s creditworthiness as basis for approving a loan, hard money lenders weigh the merits of an investment a borrower is looking to fund, and then use that investment as a collateral.
Hard money loans New York are not offered by traditional lenders like banks and financial institutions. Rather, they come from individual investors, businesses, investing groups, and financing companies.
Individuals and companies may try to secure hard money loans to purchase real estate properties as part of a bigger investment. Amateur or professional home flippers may want to get a hard money loan to finance their house flipping project, or they may be looking to purchase and repair a rental property, build or purchase a new property for business purposes.
What Makes Hard Money Loans Different from Traditional Mortgages?
There are many ways hard money loans are different from traditional mortgages, including in how they’re typically used. Hard money loans are mostly used for purchasing investment properties, rather than for a place to live.
Like with other types of loans, the requirements needed to secure a hard money can vary depending on the lender and the terms of the loan. But in general, all hard money loans share a few similarities regardless of where you get them. These are:
- Fast Funding –you can get a hard money loan in a few days or weeks, unlike traditional mortgages that can take at least 30 to 60 days.
- Short-term loans –all hard money loans have short repayment periods, the shortest being 6 months and the longest being two years. Traditional mortgages, in comparison, usually have repayment periods of 15-30 years.
- High interest rates –hard money loans may have faster processing periods but that means that their interest rates are higher than traditional mortgages. Interest rates can range from 8% to 15% which is a lot higher than what most people pay for their mortgages.
- Interest-only payments –with hard money loans New York, you’re only able to make interest-only payments first or defer hard money loan payments. With a traditional mortgage, you usually start repaying the principal and interest right away.
- Less focus on credit score –when you apply for a loan with traditional banking institutions, they usually focus on your credit score. Hard money lenders might ask to see your credit score, proof of income and experience with real estate investments, but they’re mostly concerned with the value of the property you’re planning to purchase.
- Large down payment –with hard money loans, you would have to pay at least 20% to 35% down payment based on the property’s current price/value or its after repair value (ARV). Traditional mortgages, on the other hand, often require at least 3.5% to 5% down payment, and some not at all.
- Cost and Expenses –both hard money loans and traditional mortgages have closing costs ranging at 2% to 5%. These costs may cover different kinds of expenses. Both traditional and hard money loans also impose penalties if you pay your loan off early, but hard loans usually have lower fees or shorter penalty periods.
What Risks Are Involved When You Take Out a Hard Money Loan?
A hard money loan might seem like a quick and easy way for you to start investing in real estate properties. But their high interest rates and short repayment periods can pose a lot of risk to borrowers.
For example, you might be making interest-only payments first and then must repay the entire loan at the end of a 12-month term. But if you buy a home to flip and experience several delays and problems during the repairs or can’t find a buyer, then you might not be able to repay the loan within the expected period.
Some hard money lenders will simply let you pay an extension fee to extend your loan’s repayment period, but the fee and additional interest could outweigh your returns. In case you are unable to repay the loan, the lender can foreclose the property.
Do You Have Other Options?
Besides applying for hard money loans New York, there are other ways borrowers can finance an investment property, including:
- A second mortgage –homeowners may qualify for a home equity line of credit (HELOC) or a home equity loan. The interest rate may be a lot lower than what you pay for with a hard money loan, but your current home will also be used as a collateral.
- Government-supported loan programs –you can look into government-backed loan programs from the U.S. Federal Housing Administration (FHA) and the Department of Veterans Affairs (VA), if you’re looking into buying property and don’t mind living in a multi-unit area. There are also loan programs offered by the Small Business Administration (SBA) for small business owners seeking to purchase commercial property.
- Borrowing from family and friends –another way for you to raise funds is by borrowing from friends, family members, or acquaintances who are willing to fund your project. Although your friends and family may agree to favorable loan terms, you need to be clear about the kind of risks that comes with it. Consider also how the loan can affect your relationship with your family and friends.