The range is usually between 6% and 10% for bridge loans, while hard money loans range from 10% to 18%. This means bridge loan payments can be lower compared to hard money loans.
How Do Hard Money Loans Work?
Taking a hard money loan has similarities with traditional commercial mortgages. Lenders process your application and determine your repayment terms. But unlike commercial mortgages from banks, hard money lenders are not as strict with your credit background. payday loan debt lawyer Portland Moreover, they do not use the standard underwriting process in evaluating loans.
To obtain a hard money loan, you must have sufficient equity on property. Applicants with low credit scores may qualify. You can secure it even if you have a history of foreclosure. The property is signed as collateral, which is the only protection a lender relies on in case you default on your loan.
Hard money lenders primarily determine loan approval and terms based on the property used as collateral. They do not weigh decisions heavily on your creditworthiness. A lender may sometimes perform credit checks or evaluate your credit score. However, the value of the collateral supersedes your actual financial disposition. Thus, financing is fast and do not take as long as banks or credit unions.
You can secure a hard money loan even if your personal credit score is below 680. This is the usual requirement by traditional commercial lenders. As for down payment, 20 percent to 30 percent of the loan amount is required. However, some hard money providers may require 10 percent down payment if you are an experienced house flipper.
Most hard money lenders follow a lower loan-to-value (LTV) ratio, which is 60 percent to 80 percent. Meanwhile, commercial mortgages from banks usually keep an LTV ratio of 80 percent. The lower LTV means hard money lenders do not provide as much financing as traditional commercial sources. If you default on your loan, a lender can count on selling your property quickly. They may also have higher chances of recouping the lost funds.
Higher Rates, Higher Costs
On the other hand, prepare for several drawbacks. The cost of hard money loans is generally higher compared to traditional commercial financing. Hard money loans have a rate of 10 percent to 18 percent. Meanwhile, traditional commercial loans typically have rates between 1.176 percent to 12 percent. In this respect, hard money loan rates can be greater than subprime commercial loans. The increased cost is indicative of the high risk lenders face when they offer this type of financing.
Business owners who take hard money loans justify this cost. They consider it a trade-off for the less taxing approval process. It’s the price borrowers pay for gaining faster access to commercial capital. And unlike banks, hard money loans may allow business owners to negotiate flexible repayment arrangements with their lender.
Hard money loans come with similar payment structure as traditional commercial loans, albeit with a much shorter term. They usually come in 12 month terms up to 3 years, with an interest-only payment structure. This means you only need to pay interest costs every month for the entire term. Once the payment term is done, you must make a balloon payment to pay off the remaining balance.
To give you an example, let’s say you obtained a hard money loan at $800,000 with 12 percent APR. You agreed to a term of 2 years, after which you must make the balloon payment to pay off the remaining balance. For this balloon payment, the amortization schedule is based on a 30-year term.