The average American is $38,000 in personal debt.
Taking out a loan can help consolidate the debt and make it much easier to pay off. Or, you can take out a loan for a short-term project or pay for something you need like a laptop or other items for studying or work.
There are so many types of loans you can take out that it might seem even a little bit dizzying at first. And you may be confused by the difference between a hard money loan and a soft money loan.
In this article, we’ll go over the hard money loan definition and if it is something that’s right for you.
Hard Money Loan Definition
Let’s get straight to the point. What is a hard money loan?
A hard money loan is a loan that is expressly for a short-term expense. This means you can’t really use it to pay for a home unless you’re a house flipper and working on a home you can sell for profit.
With a hard money loan, your own property is used for collateral. Therefore, if you can’t pay the loan, your property will be taken away. This doesn’t have to be your primary residence, but it is a property that you own.
How Difficult Is It To Get a Hard Money Loan?
Getting a hard money loan is typically easier than getting a soft money loan. This is because the loan itself is categorized as one that has a high risk, meaning the lending institution is used to dealing with individuals who don’t pay their fees.
Because they are so easy to get, lending institutions often have high interest rates for these types of loans. While you can often get low-interest loans from banks or other lending institutions if you have good credit, this is a type of loan that you can use if you don’t have a fantastic credit score.
As these loans are given out more freely, some people turn to them in order to finance things they may not otherwise be able to afford.
Who Gives Out Hard Money Loans?
Banks typically do not give out hard money loans. Instead, you’ll get one through a private lender that expressly deals in these types of loans.
Before you decide to take a hard money loan, it is imperative that you research the institution beforehand. A deal that seems too good to be true almost always is, and you’ll need to keep up your guard to make sure you’re not being taken for a ride with your new loan.
How Quickly Can I Get a Hard Money Loan?
Another perk of hard money loans is that they pay out rather fast. You can have your loan in a few days once you’re approved. This can enable you to then buy what it is you need as soon as possible.
Soft money loans may take a little bit longer. This is because the institution goes through several credit checks on your account before deciding to give you one.
Hard Money Loans for House Flippers
A hard money loan can be good for house flippers who are just getting their feet wet in the industry. If they don’t have a lot of personal credit, or their business isn’t well established, they may not have a great credit score, nor a good credit history.
With a hard money loan, the expectation is that the property you’re remodeling will be the collateral. If you’re able to sell the house at a profit, you’ll pay off the loan and then pocket the excess.
However, some people do have issues with this if something in the house goes wrong. Perhaps it takes longer than they anticipated to redo the house, it costs more money or the house doesn’t sell for what they thought it would.
This can mean you’ll walk away from the entire process empty-handed. Therefore, it is important that you go into a hard money loan for house flipping with your eyes wide open.
But, it can be a lucrative option, and a great way for house flippers to start their careers.
Can I Use a Hard Money Loan to Buy a House to Live In?
Although most people use hard money loans for short-term projects because most of the loans are short-term, some people will use hard money loans to buy a property.
While this isn’t ideal, it is often done because the individual has had trouble in their past with properties. Perhaps they have had a foreclosure or another problem with their property that has impacted their credit score.
If this is the case, they won’t have any choice but to use a hard money loan if they want to purchase a new property.
For those that use a hard money loan to purchase a property, the interest rates can be very high compared to soft money loans. If you can’t pay the entire house’s worth in a short period of time, you may end up losing the house.
Is a Hard Money Loan For Me?
When deciding whether a hard money loan is right for you, it is a good idea to weigh up all of the options. First, be clear on the hard money loan definition so that you’re not confused. After you’ve selected a lending institution, make sure that you understand the terms.
Last of all, you will want to make sure you know you can pay off the loan in the allotted amount of time.
Want to know the ins and outs of hard money loans for real estate professionals? Click here for more information.