A Hard Money mortgage loan or Hard Equity loan is often used as a temporary mortgage loan. Therefore the term of the loan is short (around two to five years), and it is most often interest only. It is an explicit type of financing in which a borrower receives funds based primarily on the equity value of the home.
Borrowers typically seek a hard money loan when they have a weak or little credit history, facing foreclosure, unable to provide income verification, or need to close in a short amount of time, all of which would almost always disqualify a person’s candidacy for a traditional mortgage loan.
If you need to purchase or borrow against a property you already own, that property’s collateral value is the first factor when a lender decides on approval. In a scenario where you have a foreclosure or other negative items on your credit report, a hard money loan can potentially leverage you out of these situations and increase your overall creditworthiness moving forward.
Most hard money lenders keep loan-to-value (LTV) ratios relatively low. Their maximum LTV ratio are commonly 50% to 60%, meaning they will lend 50%-60% of the property’s value. In a purchase, you will need to acquire the assets to cover the rest. With ratios this low, lenders know that if you were to default on payments and they are forced to take the property back, they can resell it at value and recover their money.
A hard money loan could solve your short term problems.
A great example of a hard money borrower would be a “fix to flip” investor. In this example, the borrower is using the funds to purchase a property, fix it up, then resell it at it’s now higher value, then pay back the loan. However, someone who is looking to live at the property long term may have another exit plan for paying back the loan in a short time, such as refinancing to a traditional mortgage once they qualify.