Hard money loans are loans that are granted based on collateral. Hard money lenders do not check one’s credit score and hand out the money solely on the collateral.
Hard money loans are not cut out for everyone. Hard Money Loans Los Angeles has higher interest rates than traditional money loans and has brief periods for clearing it.
Let us take you through how hard money loans work. Although your credit score might not count while getting a hard money loan, other essential factors are assessed before approval.
Some of the factors they look at are the DTI or the debt to income ratio, the LTV or the loan to value ratio, and home equity. Once you get approval, hard money loans get released very quickly.
Hard money loans are expensive because the lender takes a higher risk by offering the loan.
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How are Hard Money Loan rates set?
The hard money lender does a background check of the person asking for loan approval. The lender digs into a person’s financials like other traditional loan bodies; therefore, they automatically take a more significant risk than others.
They are willing to take the risk because the property is guaranteed as collateral for the loan. This allows them to resell this property if the person taking the loan cannot pay it back within the stipulated time.
Such high risks are the sole reason for such high-interest rates on hard money loans. The interest rates are a maximum of 10% more than regular mortgage rates. 11.25% is the average interest rate for a hard money loan.
Risks associated with taking a Hard Money Loan
People usually consider hard money loans only once they’ve been rejected from everywhere else. They are people’s last resort for a reason. Not everyone is equipped to take on hard money loans.
In addition to high risks and shorter periods, there are other upfront costs involved. There are origination costs and closing costs involved. This requires the borrower to pay a 30% down payment or even more, depending on the situation.
If your credit score and financial history allow you to take help from other sources of financing, then it would be a wise choice to consider traditional loans.
However, with that being said, there are specific instances when considering a hard money loan as a great option.
Getting approval for hard money loans may be challenging, but they are an excellent option to consider when you need a large sum of money in a small amount of time. If you are confident that you will be able to make a lot more money than the money you borrowed in a short amount of time, then considering a hard money loan is a good option.
Some professions that are cut out for a hard money loan without much worry are real estate, house flipping, and construction.
Final thoughts
Hard money loans should be considered after you have exhausted all your other options for taking financial help. Traditional forms of financing should be the first on your list when it comes to taking a loan, as there are fewer risks associated with it. The interest rates for traditional loans are relatively much cheaper.
Make sure you understand the pros and cons of hard money loans well before deciding to opt for them. Once you get approval for hard money loans, there is no backing out of it. They can come in handy when you need fast funds and have been rejected by other financial lenders.
