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Hard Money Loans
What are hard money loans and how do they work?
Hard money loans are a type of financing that is secured by the value of a physical asset, such as real estate. They are often used by investors to quickly obtain funding for real estate transactions, such as the purchase of a fixer-upper property or the renovation of a property for resale. Hard money loans are typically issued by private investors or companies, rather than banks or other financial institutions.
Some examples of hard money loans include:
- A loan to purchase a fixer-upper property, with the loan being secured by the value of the property itself. The borrower may be required to put up a down payment and pay a higher interest rate than they would on a traditional mortgage.
- A loan to fund the renovation of a property for resale. The loan may be secured by the value of the property after the renovations are completed.
- A loan to fund the construction of a new property, with the loan being secured by the value of the finished property.
- Hard money loans are often used in situations where the borrower may not qualify for a traditional mortgage or where the borrower needs to obtain funding quickly. However, they tend to have higher interest rates and shorter repayment terms than traditional mortgages and may not be suitable for everyone.
How are hard money loans used to finance site development and/or new construction?
Hard money loans are often used for short-term financing to fund construction projects. A primary reason these types of loans are attractive to builders and developers at they can be obtained quickly and with less documentation than traditional loans from banks.
Here’s the process:
- The developer or builder identifies a property that they want to purchase or develop and secures a contract for the purchase.
- Next, the developer or builder applies for a hard money loan from a private investor or lending company. This process usually involves providing the lender with details about the property, the construction project, and the borrower’s financial situation.
- If the lender approves the loan, they will provide the developer or builder with the funds needed to purchase the property and begin the construction project.
- The developer or builder uses the loan funds to purchase the property and begin construction.
- As the construction project progresses, the developer or builder may be required to make periodic interest payments on the loan.
- Once the construction project is complete, the developer or builder will typically either refinance the hard money loan with a traditional mortgage or sell the property to repay the loan.
- It’s important to note that hard money loans tend to have higher interest rates and fees than traditional loans, so they should generally be used only for short-term financing. Additionally, hard money loans are typically only available for properties that have a high value or a strong potential for appreciation.