What are Residential Hard Money Loans

What are Residential Hard Money Loans

Hard money loans are a popular way of financing in those areas where traditional lending companies are hesitant to step in. This type of capital is available for every type of customer in real estate financing. The rate of interest charged on them is higher than other conventional loans. Apart from a high interest rate, the loan-to-value (LTV) of a property becomes much lower in this case, when compared to other financing options.

Hard Money Loan for Residential Property

These are provided by private lenders on the basis of the LTV of a property. Traditional loans are granted on the criteria of credit scores, tax returns, and income statements, whereas, in the case of residential ones, they are granted with the property as collateral. These money lenders consider the equity of a property as the basis for underwriting. They specialize in either commercial or residential properties, but some of them deal in land estates and projects with a higher equity. They underwrite by calculating the LTV, based on current market price of a property.

The amount is used as a temporary bridge for mortgage refinance, acquisition, or avoiding bankruptcy. This is preferred, instead of giving total control of a property to financial partners or filing for bankruptcy. The capital is used by people who need financing for renovation of residential properties, before renting or selling them. These lenders prefer borrowers who need the loan for income-producing properties such as retail or shopping centers, industrial offices and buildings, hotels or motels, medical institutions, and restaurants, etc.

The capital is provided on the value of the real estate property which also acts as a collateral for the same. They are provided on the basis of LTV of a property, which usually lies between 60-75 percent of the market value.

Lending firms are known to offer interest rates in the range of 11-12 percent for first trust deeds and 12 percent for second trust deeds. They also provide 60 percent maximum LTV of improved properties and 40% maximum LTV on land. Housing loans for secondary occupied houses are easier to fund with the loan going up to 75 percent LTV. Properties on which such a loan has been secured, is valued at 30-50 percent of the market value of the property.

Most traditional lenders provide finance on the basis of credit reports, income statements, and tax returns, that act as proof for eligibility. Lenders usually fix loan amounts, interest rates, and other terms and conditions according to the eligibility of the borrower.

However, in this case, lenders provide money on the basis of real estate value of properties. Eligibility is flexible with limited requirements and documentation kept to a minimum. Lenders allow borrowers with less credit to avail primary residency loans of approximately 65 percent LTV, if they provide sufficient proof and equity.

Loan Realization
Property values are estimated on the basis of LTV considered on the property’s current market price. The amount is fixed at a price which the lender can realize when the property is sold. Lenders sell the property when the borrower defaults in making payments, in order to realize the amount. A borrower is provided with a grace period of one to three months before the property is sold.

Capital generation from these sources is expensive, because of their high-interest rates, but they are useful during emergencies. A good payment option can help a person to reap maximum benefits from these loans.