When it comes to applying for a mortgage loan, many prospective borrowers have a similar set of expectations when it comes to a traditional or conventional loan’s qualifications and requirements: a bank checks your credit score, credit history, job history, salary, cash on hand, and feeds it all into a formula, which decides whether you have been approved for the loan or denied.
Many borrowers are often unaware that an entirely different option exists for qualifying clients: the hard money loan.
Understanding Hard Money Loans
Simply put, a hard money loan is financing offered by a lender that is backed by physical assets — usually property — as a form of collateral. The loan is often funded by private lenders or even individuals who either lend their own money or as part of a group of investors.
As hard money loans use physical assets to back the loan, it is not typically necessary to check borrowers’ credit scores or income as part of the loan process. Hard money lenders are more interested in the value of the collateral property or asset(s), not the borrower’s creditworthiness.
Hard money loans are not underwritten with the same stringency as conventional loans and are not backed by the federal government, which earns them a designation as ‘non-qualified’ (non-QM) loans. Thus, the inherent risk with hard money loans is somewhat greater than conventional loans and interest rates are typically higher for hard money borrowers than ‘conventional’ borrowers.
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Is a Hard Money Loan Right For You?
However, this option can be ideal for borrowers who may have had rocky credit history or whose level of income is insufficient or inconsistent for traditional loans, but who own valuable investments and/or looking to expand their investment portfolios.
As the process for hard money loans is streamlined compared to traditional loans, hard money loan borrowers usually receive their funds much faster than the alternative. And for customers looking to use hard money loan capital to purchase, renovate, and flip properties quickly, the loan’s higher interest rates may only have a minimal, or even nonexistent, negative effect.
Hard money loans are designed to be paid and discharged in the short term, unlike conventional mortgages, which can be structured to last 10, 20, even 30 years.
So, how do lenders calculate how much money they can offer on a hard money loan? A calculation called loan-to-value, or LTV.
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What is LTV?
Because any loan carries some degree of latent risk, the lender must determine what percentage of the property’s value they wish to lend against. Most hard money lenders offer a loan of 65% to 75% of the collateral’s value.
For example, say that a borrower owns a home worth $1,000,000 and wishes to use it as collateral to take out a hard money loan to buy a second home worth $1,000,000 for use as an investment property. A lender who agrees to outlay a 75 LTV hard money loan would be able to offer the borrower a $750,000 loan, 75% of the collateral property’s value.
For Park Place Finance, loans in excess of the LTV amounts calculated are permitted to the extent that they are approved by management and sufficient compensating factors to offset additional leverage, up to 90% (LTV – as is) and 75% (LTV – as repaired).
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You Need a Lender You Can Trust
Your best option for a hard money loan is with a trusted lender specialized in a variety of specialty loans like hard money & fix-and-flip loans. Park Place Finance offers hard money loans with competitive interest rates and fast closing times, so you can move to the next chapter in your life.
Call us today at (866) 407-1599 to find the best option for your individual financial situation.