When you need a loan right away and have been denied by traditional lenders, a hard money loan might be your best bet. Hard money refers to borrowing money without involving traditional mortgage lenders. Instead, the loan comes from individuals or investors who loan you money based on the property being used for collateral.
The 411 on Hard Money
Qualifying for a traditional loan can be a hassle, because the lender will need proof that you can repay them along with your available income, credit scores and your debt to income ratio, which measures how responsible you have been in the past with loans. This process is often painfully slow, even if everything checks out, and even longer if any negative items pop up in your credit reports.
Hard money lending in Los Angeles, and elsewhere, is different. Lenders are less concerned with your ability to repay them, and instead focus securing the loan using collateral. If something happens and you can’t repay the loan, the lenders will take what you owe by selling the collateral. Overall, the value of the collateral is more important to a hard money lender than your financial situation. Hard money loans have higher interest rates than traditional loans, so they only last 1-5 years.
Reasons to Use Hard Money Loans
Hard money loans tend to be approved quicker than traditional loans because lenders don’t have to go through every detail of the application. This is especially beneficial in a hot market where you have multiple offers. Hard money loan agreements are often more flexible as well. Instead of using a standard underwriting process, lenders evaluate each deal individually, and you may even be able to tweak certain parts, like repayment schedules, depending on your situation. The most important component to the loan is, of course on collateral. A hard money lender will loan you as much as the property is worth. Plus, the loan-to value (LTV) ratio will stay low, with a maximum of 50% to 70% relatively, allowing lenders the ability to sell your property quickly.
Why Hard Money Loans Make Sense
Hard money lending in Los Angeles and other areas work best for short term loans. Fix-and-flip investors, for example, own property just long enough for the value to increase, then sell the property and repay the loan within a year, making them ideal hard money users. You can also use a hard money loan to buy a property and continue living there, but you will need to refinance as soon as you possibly can so you can get a better loan. Additionally, finding and connecting with a hard money investor is easy, since many can be found quickly on the internet. You should talk to a few investors to see what they have to offer before applying for any loans.