If you have a lot of equity available, are looking for a fast closing, and are either self-employed or are looking to pull cash out of an investment property – you may have heard the term “hard money loan” bounced around. Hard money loans are a type of loan that focuses more on the equity position available, than credit, for qualifying. They are also known for their extremely streamlined process, with quick underwriting and faster time frames than more traditional loan options.
So what is a hard money loan?
A hard money loan (also known as a private equity loan) is a type of loan where the funds come from an individual investor, or a fund, to lend the money on a mortgage. When you go to a big bank or a direct lender, usually they are putting the loans on a warehouse line and then selling them off on the secondary market. Or, they have a large pool of funds that are utilized to lend the money. However, with private investors in a hard money loan, there is a lot more flexibility for our clients.
With a hard money loan, also called a private equity loan, the interest rates are typically higher than something like a conventional or government loan; as it is an individual investor that is looking to make a return on their funds. However, your monthly payments are typically interest only payments, so that does not necessarily mean that your payments will be higher than a conventional or government loan. The key difference is that you will not be paying down the principal balance, during the loan term. Hard money loans are also temporary loans, usually 2-5 years in length.
Once the loan closes, you will start making your regular monthly payments to the investor. At the end of the loan term (2-5 years, depending on which is selected), the loan “balloons,” meaning that the full principal balance becomes due. Before closing on the loan, your loan officer should be discussing exit strategies with you to make sure a game plan is in place before signing off on the loan. Some of these exit strategies may include refinancing the loan, or selling the home if that was your intention, to pay off the balance. If you are intending to refinance, usually we will look at doing that around 6 months to a year before the loan term ends, to give us plenty of time to figure out which loan program we can refinance you into. If you are working on building your credit, we will also discuss different options for building your credit to make sure we are on track to ensure a smooth refinance process later down the road.
Now, a private equity loan/hard money loan is in essence a business purpose loan. Some states allow a hard money loan to be done on a primary residence, but for most, it has to be an investment property. California is one of the states, that may allow for a private equity loan to be done on a primary residence in select circumstances. Here are a few examples, of different scenarios that may qualify for a private equity loan:
- An investment property that you are looking to use funds to remodel.
- You are self-employed, and are looking to use funds to start, grow, or maintain a business.
- You are looking to use funds to purchase an investment property, whether it is for a down payment or to buy it in full.
- An investment property that has default taxes that need to be caught up, or HOA fees that need to be brought current.
- An investment property that needs renovations or upgrades (such as HVAC units, new kitchen, plumbing, bathroom, roof, etc).
- A property that you are looking to turn into an investment property, whether inherited or purchased, and funds are needed to achieve those goals.
The business purpose reason is one of the most important aspects to qualify, aside from equity available, so it is important to discuss what the funds are intended for with your loan officer – to make sure that you will qualify.
If you are still unsure if a hard money loan may be the right fit for you, feel free to reach out to us today for a free consultation. We are happy to explain anything that may seem confusing or answer any questions you may have. At Independent Home Finance Inc., our top priority is ensuring that you are fully informed of your different options – and helping you achieve your goals, with a loan program that is the right fit for you.