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Borrowing funds from hard money lenders is a useful tool for investors. By going this route, the home investor can save out of pocket costs while obtaining the funding necessary to finish the project. licensed money lender While there are risks involved, those interested in obtaining short-term cash to renovate their home might consider this loan.
What Are Hard Money Lenders?
To understand the benefits of using this type of loan fully, you must first understand what it is. Unlike a conventional loan, you may not have to put as much down towards the total price. For example, if you want to get a $50,000 loan for improvements with a traditional loan, you would have to put down 20 percent. With “hard money,” you only have to pay a down payment of 10 percent.
The lower down payment is appealing. However, these types of loans are a little tougher to get because the lender does not look at things like the ability to repay, FICA score, or debt to income ratio. This makes the underwriter more stringent on who can actually obtain the funds. You do have to have collateral in hand in order to obtain the funds. If you wish to use the funds for renovations to your home, you may use the residence as collateral. Other types of property usually used as collateral are cars, boats, land, paintings, and even airplanes.
Despite the lower down payment, hard money lenders typically charge higher interest rates. The term is also shorter, which is why it is a good option for bridge loans or quick renovations of properties that are to be flipped and sold for profit.
These underwriters are companies or individuals that are in the business of offering the collateral backed loans. You won’t find them at your local bank branch. However, in order to loan money for residential properties, they must have a license through the state regulatory agency and through the National Mortgage Licensing System.
How Can Homeowners Use Bridge Loans?
Most property owners who wish to renovate use their current level of equity to do so. However, if you see a home you wish to purchase and live in, but it needs minor repairs first in order to obtain traditional financing, a bridge is perfect. This loan can include the money you need in order to complete the renovation in a timely manner.
By including the funds for the renovation in the loan, you only have to pay the down payment out of pocket. In the example of the $50,000 home, if it needs $20,000 in renovations, a traditional loan would require you to be out of pocket $30,000, which includes a 20 percent down payment and the project money. However, hard money lenders could give you $70,000 for only 10 percent down. Of course, you could pay 15 percent in interest.
The key is having traditional financing lined up in order to move forward once the project is complete. You must keep in contact with your mortgage lending company during this time to ensure regulations have not changed, forcing you to lose your pre-approved mortgage to take over the bridge loan.