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Getting Your Hard Money Loan Approved: A Definitive Guide

In 2021 the real estate market exploded, and experts expect trends to continue into 2022.
Most people need to take out a loan when purchasing a property, whether they plan on living in it or using it as an investment. A traditional bank loan typically lasts for a long time and accrues significant interest over the years. Securing a traditional loan may also take too long to secure a property in a competitive market. Enter private money.

Private loans are growing in popularity and may be a great option if you plan on investing in real estate or deeds of trust this year. Here is how to apply for a hard money loan.

What is a hard money loan anyways?
While banks use factors such as financial history and credit to decide whether to finance a traditional loan, hard money or private loans use property as collateral. In the case of buying a home, the home itself would act as collateral. Hard money lenders are not banks, as in the case of traditional loans, but instead private companies or individuals. If a borrower is unable to pay the hard money loan, the property, in most cases related, is taken as the repayment for the loan. 

 

How long does it take for a hard money loan to be approved?
The process of buying a house is notorious for how long it takes, but it doesn’t have to be this way. The lengthy process of purchasing property can be blamed on traditional loans. The hard money loan application process, on the other hand, is usually approved quickly and if you are approved you usually receive the funds within a week.

Unlike traditional loans which span periods of many years, typically 15 to 30, hard money loans typically are for 1 to 3 year terms, making them a great option for people who plan on using the property as an investment.

 

Who should apply for a hard money loan?
The most significant benefit of a hard money loan is its speed, which is important for a few reasons. In a competitive market, a real estate investor who can present funds quickly is sure to impress the seller. This is also important if you are looking to add this asset to your portfolio of investments.

A hard money loan is also a good option for people who need a fresh start financially and who may not have the best history, whether that’s due to credit issues, foreclosure, or income history. A short income history may cause a traditional loan to be denied, even if the applicant has the income to pay off the loan.

Hard money lenders aren’t concerned with these factors. Instead, they just look at the value of the property and how much equity the borrower has invested.


How to get your hard money loan approved
Hard money loans don’t come from a bank like traditional loans. This means that there is more opportunity for negotiation. This also means that requirements may vary between different lenders. That being said, most hard money loans have a few main requirements.

Down payment and equity: you need to have a down payment or equity in the property to use as collateral for the loan. This usually ranges from 25 to 30% for residential property and a little more for commercial property–typical 40 to 40%. You have a better chance of being approved the more equity you have, or the higher the down payment as it lowers the risk for the lender.

Cash on hand: The next typical requirement is the ability to pay back the loan and to cover costs such as insurance and tax. Usually they look for cash reserves, however a borrower without cash reserves can still receive the loan if they are willing to increase the loan amount to cover those costs.

The safety of hard money loans
Hard money loans are safe and effective when you have a lender you trust and the assets to pay it back. You can end up saving money in the long run with the short lending period and by freeing up other funds.

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