How Do Hard Money Loans Work?

Private Home Mortgage for Renovations

Hard money loans could be a new term to many readers, but they’re becoming quite popular across Canada. Some people may also know them by the name private money loans. A hard money loan is basically a short-term loan which is used to purchase real estate, consolidate debt, complete home renovations, etc. The money is provided by a private investor or group and they’re used as an alternative to traditional money lenders such as banks and credit unions. A hard money loan is generally about 12 months long, but some borrowers may ask for longer terms of up to five years.

Types of Hard Money Loans

These types of loans usually consist of monthly interest only payments, or in some cases, interest as well as some of the principal. The majority of the loan is often paid off at the end of the agreement. The amount of cash a lender will agree to will typically depend on the value of the property the borrower intends to purchase or refinance. If you’re looking to borrow money and already own a property, it can be used as collateral. Most lenders are usually more interested in the value, location, and condition of the property than they are about the credit situation of the borrower.

Who Uses Hard Money Lending?

Borrowers who are having difficulty obtaining a conventional loan because of a short sale or foreclosure can typically find a lender if they have enough equity in the collateral property. Canadians can usually receive a hard money loan on all types of properties including land, residential, industrial and commercial, but some lenders may specialize in just one type. However, a hard money loan isn’t always the best road to go down. If you have good credit and a dependable income, then a conventional form of financing is usually the best solution. A hard loan is generally a better option if you’re in a hurry to make a purchase or the banks have turned you down.

Another reason many borrow from private lenders is on pre-construction purchases. Institutional lenders will only lend based on the purchase price, even though it was set years earlier and likely the value of the property has gone up by the closing date. A private lender will lend based on the current appraised value, which would allow for a lesser down payment than would be expected from an institutional lender because of the higher appraised value. The borrower will then refinance institutional after a year’s time in order to get back into the better rates of institutional financing.

Other reasons for obtaining private financing would include construction financing and/or for paying out income tax arrears to Canada Revenue Agency. Many institutional lenders may not lend for construction purposes, and no institutional lender will pay out CRA income tax arrears. A hard money loan would be available in both of these circumstances, assuming the lender likes the security and there is equity available.

When a Hard Money Loan May Make Sense

A hard money loan is often a good choice if you have a bad credit rating, if you intend on buying a home and reselling it after fixing it up, or if you intend to use the money for a land or construction deal. If you’re unclear about a hard money loan please feel free to contact our team of professionals at MortgageMeister.com. We’ll be glad to let you know if it’s a good option for your situation, and have the network of lenders available to help you obtain the financing you’re looking for.

Hard Money Loans for Real Estate Investing

Many real estate investors opt for a hard money loan since it can usually be obtained quite quickly, sometimes within a week. But these loans aren’t restricted to those in the real estate field. They’re suitable for regular homeowners who are faced with a short time frame to do business as well as those who have issues with their credit, are self-employed and show little taxable income, owe income tax arrears to CRA, foreclosures etc. The rate of interest charged for a hard money loan will depend on the lender, as well as the overall quality of the borrower and security. The interest rate charged is higher than a conventional loan; it could be anywhere from 5-15%.

How Much Can You Borrow?

The amount of money you can borrow will typically depend on the ratio of the loan to value. For instance, you may find a lender who will finance up to 85 per cent of the property’s current value. Other lenders may consider the post-construction/post-renovation value. The higher the loan to value, typically the higher the rate charged by the private lender. The best way to learn more about a hard money loan is to speak with a professional mortgage company such as MortgageMeister.com for experienced guidance and assistance.

MortgageMeister.com is an Ontario-based mortgage brokerage, specializing in Private Mortgages.  We offer mortgage solutions for various lifestyle situations and can work with you to find the right loan for your circumstances.

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