Hard money loans are the forms of loans commonly obtained by borrowers who have landed properties (such as homes) and wish to use them as collateral. Both borrowers and lenders find these forms of loans beneficial.
Besides the fact that they don’t require plenty of paperwork, hard money loans permit lenders to bear little or no risk if borrowers fail to repay since they can readily acquire full possession of the borrowers’ collateral in such a situation.
Basically, hard money loans are obtained on short-term bases but in certain cases, some of these loans may be extended for some years.
New Construction Loans
These loans might not be as common as the other types of hard money loans but they still constitute home loans in the United States. While new construction loans are aimed at bridging the time gap required for a home construction, they also come as short-term loans.
On the one hand, intending home buyers with special financing find them beneficial and on the other, builders prefer them since buyers are likely available for their new home constructions. Besides, such builders are at liberty of selling the homes if the intending buyers fail to pay.
People intending to buy homes may enter into deals with builders and in order to start their home constructions, they sometimes obtain new construction loans. On completion of such homes, the buyers acquire their possession and then move into them. Depending on the buyers’ objectives, such loans may be redeveloped into hard money loans or standard mortgages.
At times, builders directly plan loan arrangements with intending buyers and shoulder the responsibility of financing the home loan. Often known as “carrying the note”, this situation may cause these loans to involve a greater rate of interest compared to other standard loans. Meanwhile, new construction loans are beneficial loan arrangements best enjoyed by intending buyers who have poor credit histories or can’t provide evidence of their incomes and therefore need special financing.
Bridge loan financing is one of the most popular kinds of hard money loans. Commonly associated with sellers’ markets, these kinds of hard money loans are suitable for people intending to buy and sell homes. Simply put, such people wish to purchase new homes before initiating the sale of existing ones. Meanwhile, they need to obtain these loans because the money required for purchasing the new homes will be raised through the sale of the existing homes. Once they’re able to obtain these loans, such people acquire the new homes and raise funds to pay back the loans after the sale of the existing homes.
Probate lending is another popular form of hard money loan that allows people to get significant amount of money. These lenders provide loans to individuals based on their inheritance property. In fact, probate is a legal process of settling an estate according to the will of the deceased. In short, this is the loan to heirs and beneficiaries of a recently died individual in need of short-term financing.
These kinds of hard money loans are further divided into two types. In the case of the first type, which is the less common of the two, a borrower is allowed to use a hard money loan in refinancing his mortgage. It’s considered a “cash out refinance loan” as it allows the borrower to withdraw cash from the loan deal by augmenting the principle amount.
The second type of refinance loans applies to those who have used short-term hard money loans in buying homes and now wish to convert the loans into standard mortgages. While this loan type is more common, it demands that borrowers are eligible for the new mortgages but still permits them to refinance the entirety of the loans through the bank.