What is a Hard Money Loan or a Bridge Loan
Hard Money Loan.
You may have heard of a hard money loan also known as a bridge loan and wonder what it is and why do people use them. The first though in many peoples mind is that a hard money loan is a juice loan. That is not the case. When you deal with legitimate businesses that specialize in making high risk loans to businesses then these are Hard Money Loans.
What Makes It Hard.
Standard conventional underwriting for residential hard money and commercial loans require that you verify income, assets, credit and collateral. A borrower must meet the minimum criteria in each of the categories to qualify for conventional financing, which is generally the best rate and fees because of the lower risk. When a borrower does not meet any of these criteria they no longer qualify for financing and the loan request becomes “hard” to do because of the higher risk.
It is considered “hard” from the borrowers perspective because of the increased cost. All bridge loans have higher rates and higher fees and therefore are short term financing. As a business person these higher rates and fees only make sense when the potential reward or return on investment is high enough to offset them. That is why these loans are only for businesses.
Why Can’t a Homeowner Get a Residential Hard Money Loan?
Hard money loans are for business purposes only. Because of the higher fees and cost they would be a violation of usury laws and predatory lending laws the limit the rate and fees that can be charged on a consumer mortgage. Truly they should not be for the consumer in another sense. Residential Hard money loans are only for investment purposes and though your residence is a personal investment it is primarily your home and not a speculative investment.
Why Would You Use a Hard Money Loan.
As a Real Estate Investor or any investor, what makes an investment worth while is your return on investment. If you meet all the criteria of a conventional residential investment or commercial loan the long term return on investment will always be more favorable. But in the short term many times you will be able to invest less (some times nothing at all) and receive a high return even with higher costs. For example: If you could buy a property for $150,000 and spend $150,000 to totally rehab the property assuming the value would be $600,000 after rehab this is how the returns would compare. Conventional financing may require 30% down payment or $90,000 plus closing cost of $5,000. With a return of 300,000 on your 95,000 investment would be very good at 315%. That same scenario for a hard money loan may cost you 30,000 more but you would have upfront investment except closing cost of 15,000 (which can often be rolled in the loan) with a return of only $270,000. for a $15,000 investment you would net a 2,000% return on you investment. Which would you prefer to invest $95,000 to earn $300,000 or $15,000 to earn $270,000. As a matter of fact with the leverage of a bridge loan you can theoretically do 6 projects for the same $95,000 to receive 6 times the return. In reality you would just do a larger project for a larger return.
No related posts.
Related posts brought to you by Yet Another Related Posts Plugin.