A hard money loan is a short-term loan in which the value of real property owned by the borrower is used as its collateral. It is a way to borrow without using traditional mortgage lenders. In hard money loan, loans are lent by the individual on the property; the borrower is using as collateral. When you need a quick loan, and somehow traditional lenders are not approving your loan, hard money comes as a quick option to sort out your worries. Let’s review how these loans work.
How it Works
A hard money loan lends money for short-term expenditures, quite akin to a bridge loan. A hard money lender gives the loan up until he has the borrower’s property as collateral against any default. People who have poor credit score usually go for hard money loan because to get a loan from the bank is not possible for them.
Let’s take an example to understand it more clearly – presume Martin’s current month’s paycheck has been exhausted and he still needs money for his remaining expenses till he collects his next paycheck. He has applied for a loan to several traditional lenders, but they reject all his loan applications due to his poor credit history. Although Martin doesn’t have good cash in his hand, but he has a small land valuing $150,000. So, he approaches to a hard money lender who is ready to lend $75,000 against his property as collateral. Meanwhile, his land will remain with the lender until he pays back with the terms decided between him and his lender.
Why it Matters
Hard money lenders charge high interest on hard money loans assuming the high level of risk involved due to borrower’s poor credit score. Never get confused between hard money loan and equity loans, equity loans are given by bank after evaluating the home value and borrower’s credit score.
A hard money loan can be a great solution if you need money quickly and for a short amount of time. Many borrowers choose to obtain a hard money loan when they’re purchasing a property they plan to renovate and sell for a profit. If you’re getting ready to apply for a hard money loan, you are probably looking for “hard money direct lenders”. Once you find a lender you like, there are factors that can affect your ability to receive hard money loan approval. The amount of collateral in the property and your loan repayment plan are two things that can determine whether or not you receive approval. Here’s how an appraisal can affect your loan.
Appraisal Factors
An appraisal is a type of property analysis that determines value based on the property itself and comparable properties that have recently been sold in the area. A broker price opinion may be factored into the analysis. The BPO is unfortunately only as good as the broker performing it. To get the most accurate opinion possible, find a broker who has a good reputation for offering unbiased assessments. You can also have another appraiser review the initial appraisal if you’re concerned about accuracy and fairness.
If an appraisal shows the value of the property will be significantly higher after the loan is approved and all planned work is done on the property, the lender is more likely to extend funding. On the flipside, if the appraisal shows that the property value will not significantly increase after loan approval and property improvements, you’re less likely to receive the approval you’re seeking from private money lenders.
Improve Your Approval Chances
To improve your chances of loan approval, do everything you can to get a good appraisal. You can do this by making sure the property you want to purchase is priced fairly and that you have a solid plan for making affordable improvements that will increase property value.
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