In an ideal world, we would be able to make all our purchases in cash with zero debt.
In our current economy, however, that’s simply not possible.
When it comes to big purchases like a house, or a car, or to large, unexpected expenses, sometimes the only option for Californians is to take out a loan.
For some borrowers, however, conventional financing options aren’t an option. For instance, some studies show that as many as 21 percent of borrowers are denied when seeking a home mortgage.
Factors like poor credit, insufficient income history, or additional debt can all factor into loan denials for prospective borrowers.
Banks refuse borrowers because they are unwilling to take on the risk of the loan not being repaid. Just because a person has these extenuating circumstances, however, does not necessarily mean that they would be unable to repay the loan.
This is where hard money loans can be a great option for borrowers in California.
That said, even though hard money loans don’t have all the same underwriting restrictions of conventional financing, there is still a process of securing one.
So, let’s briefly look at the difference between a bank loan and a hard money loan. We will look at why someone would choose a hard money loan and how to go about getting a hard money loan.
What is a hard money loan?
Before we tackle how to get a hard money loan, let’s first look at what that is, and how it is different from obtaining financing through a bank.
The main difference between this loan and a bank loan are the guidelines by which they qualify a borrower.
With a bank loan there are strict guidelines that must be followed in order to qualify for a loan. The decision is based on many factors that tell the bank the likelihood that the borrower will be able to pay the loan.
Banks closely look at factors such as credit score, income history, and current debt to income ratio.
This helps when it comes to a hard money loan, however, hard money lenders make their lending decision based on the loan to value ratio of what is being put up for collateral. This ensures that if the borrower is unable to repay, the lender will receive the collateral and sell it to recoup the money they lent.
For this reason, hard money loans typically have higher interest rates and shorter terms than traditional loans.
Another difference between a hard money loan and a bank loan is the identity of the investor.
With a bank loan, you are borrowing money from a financial institution. Hard money loans, however, come from individuals, like private investors.
The main difference is that individuals with bad credit, little to no income documentation and problem properties can qualify for a hard money loan and not a bank loan.
Why choose a hard money loan?
There are quite a few benefits to using a hard money loan. Unlike bank loans, which can take weeks to get approved for, hard money loans can often be approved very quickly.
So, if you’re in a situation where you need financing quickly a hard money loan can be a great way to get the cash you need.
Additionally, hard money loans are usually made directly to a borrower, rather than through an institution. Because of this, the terms of these loans are often more flexible.
Furthermore, while the interest is higher on hard money loans, the borrower typically has lower payments throughout the loan.
This is because the monthly payments on hard money loans are interest-only. The payment of the principal of the loan is deferred until the end and is paid in a balloon payment.
A hard money loan can also be a good choice if you are currently tight on money and can later refinance into a bank loan with a lower interest rate and a longer term.
A hard money loan could be a good option if you are looking to flip a property, and sell it for profit. This is because, with a flip, you are not planning on keeping the property for a long period of time.
There are many reasons to choose an alternative loan but the main reason is you couldn’t qualify for a bank loan because of your credit, your ability to show income or you have a property with issues.
How to get a hard money loan
Are you thinking that a hard money loan could be the right choice for you? Let’s look at how to get one.
What qualifies for a hard money loan?
Because hard money loans are based on your loan to value ratio (LTV), they are typically available for most types of properties. This includes residential, multi-family, commercial, and land.
So let’s say for example that a borrower is buying an investment property worth $100,000. They have $20,000 for a down payment. That means they will need a hard money loan for $80,000. What then is your LTV? You will simply calculate 80,000/100,000 = 0.80. (Loan Amount/Home Value=LTV). Your LTV is 80%!
It is important to note that the home value is not what the borrower is purchasing the house for or what the house was listed for on the market. The home value is the appraised or current market value. Most alternative lenders will lend on a 65% LTV or lower. If the LTV is higher you still might have some options.
That said, don’t forget that hard money loans come from private investors. This means that the properties that will qualify for these types of loans will vary based on the investor that you’re working with.
The best way to know for sure what kinds of properties will qualify for a hard money loan is to ask the hard money lender.
Finding a lender
Again, with hard money loans, lenders are less concerned with the borrower’s personal financial history.
Instead, the lender you work with will be more interested in learning about the state of the property, and your plans for working with it. This information will help the lender determine whether the loan makes sense for all parties involved.
The most important consideration when learning how to get a hard money loan, however, is finding the right company to work with. It’s important to go through a reputable hard money lending company like ARC Capital.
If you’re ready to find an investor for your hard money loan, you should contact us. We will work with you to find the best choice for your specific needs.