A hard money loan is one way of borrowing money without the use of traditional mortgage lenders. This means that loans come from people or investors who lend their money based on the property you’re using as collateral. So, when traditional lenders do not approve a loan, or when loans need to happen quickly, New Jersey hard money loans may be the only option. But before you go for this option, you must understand how this type of loan works. What does this involve, and what are the benefits of going for hard money loans?
New Jersey Hard Money Loans: Everything You Need to Know
What is hard money?
Most loans will need proof that you can repay them. Typically, the lenders are often interested in your credit scores, as well as your income available in repaying the loan. If you happen to have a solid history of borrowing responsibility, with the ability to repay loans (this is measured by your debt-to-income ratio), then you’ll easily get approved for a loan.
The process of getting approved with a traditional lender is very slow. Even if you already have great credit scores and plenty of income, the process remains painfully slow. If your credit report indicates negative items, or if you have an income that is difficult to verify (to your lender’s satisfaction), then the process is even slower. It can take longer, and you might not get approved.
The process for New Jersey hard money loans is a whole different process. Hard money lenders lend money based on collateral that secures the loan. They are less concerned about your ability to repay it. So, if you are unable to repay it, hard money lenders will get their money back by taking the collateral and selling it. To them, the value of the collateral is more important than the borrowers’ financial position.
New Jersey hard money loans are usually short-term loans, which last from one to five years. If you’re the borrower, you wouldn’t want to keep them much longer than that. If you do so, the interest rates for hard money loans can get higher compared to those of traditional loans.
What are the pros of hard money loans?
If hard money is more expensive, then why do you need to use it? The answer is simple – hard money has its place for the types of borrowers who cannot get traditional funding when they need it. Below are the reasons why people go for hard money loans:
1. Approval – The most important factor when it comes to New Jersey hard money loans is collateral. If you want to buy an investment property, the lender will lend as much as the property’s worth. If you need to borrow against another property you own, then that property’s value is what the lender will be focused on. If you’ve gotten a foreclosure or any negative items in your credit report, it won’t be as important. Some lenders might even ignore this part of your credit report.
2. Flexibility – Hard money agreements can be more flexible compared to traditional loan agreements. Lenders don’t have to use a standardized underwriting process. They, however, evaluate each deal individually. Based on your situation, you may have to tweak things, like your repayment schedules. You might be borrowing from someone willing to talk, and not a large corporation that follows strict policies.
3. Speed – Because the lender’s focus is on the collateral, and not on your financial position, hard money loans can be closed more quickly compared to traditional loans. Lenders don’t take ownership of your property, and they don’t need to spend a lot of time going through a loan application with a fine-toothed comb (like reviewing your bank statements, verifying your income, and more). Once you already have a relationship with a lender, the process can just move quickly. This gives you the ability to close deals that others can’t always close, especially in hot markets with multiple offers.
Most hard money lenders will keep a loan-to-value ratio relatively low. The maximum LTV ratio might be 50 percent to 70 percent. Therefore, you will need some assets to qualify for hard money. With this ratio, lenders will know that they can sell your property quickly, and have a reasonable shot at getting back their money.
Does hard money make sense?
Hard money loans only make the most sense for short-term loans. Fix-and-flip investors are among the best examples of hard money users. They own a property that is long enough to increase the value, and they don’t live there forever. They usually sell the property and then repay the loan (usually within one year or so). You can use hard money to get into a property and stay there, but you would want to re-finance it as soon as you get a better loan.
What are the drawbacks of hard money loans?
Hard money isn’t perfect. It seems very simple: an asset will secure the loan so both parties are safe. However, hard money is only one option. It is expensive, so things will have to work according to plan so that profits will materialize.
Another thing to note is that hard money works differently from traditional loans. Lenders might use more conservative options to value property than you expect. If you can qualify for other forms of financing, you may come out ahead. For instance, FHA loans let you borrow even with less than the preferred credit. With hard money loans, you can expect to pay double-digit interest rates.
If you can’t get approved for a loan because your property needs serious repairs, you may be able to pay rehabilitation at a lower cost.
New Jersey Hard Money Loans: How to find hard money lenders?
In order to borrow money, you’ll need to get connected with investors. For you to do this, check out who in your area lends money based on collateral. You can find local real estate agents and real estate investor groups to get their names.
Reach out to a few lenders and then discuss your needs. Develop a relationship with them so you can fund projects quickly when the time comes.
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