Owning a home is a part of the American dream. Americans cannot wait until the day that they can finally afford their own home. A bank often provides us with a preapproval amount. This amount is the size or price of home that we can afford to purchase. In addition to that amount, we are charged high percentage rates of interest. This interest is our fee for borrowing that money for the home we wanted. What happens then, when we want to purchase a second home? What about an investment property? Do we have to wait until the first home is completely paid off? Oftentimes, the bank does not allow us to take out another mortgage until the first one is paid off, which can be up to 30 years long.
Fortunately, those with good credit and consistent equity have the ability to get more credit for second homeownerships and investments. This comes in the form of hard money. Hard money often comes from private investors who may charge a higher interest rate, but will provide the money when no other banking institution will. They may also offer shorter loan terms. However, this is ideal, considering that most investment opportunities are shorter termed.
Duration of payment period for a private loan is also shorter compared to the traditional loan which can usually go from 1 year up to 20 years, while private loans can only be granted with duration of up to 5 years. However, most investment properties intend to sell within the first few months, avoiding the high interest charges of private hard money lenders and staying within the loan term limits.
Some private hard money lenders may also require some type of security with the hard money loans. A traditional mortgage company has the house as their security. If you default on the traditional mortgage, the home goes back to the mortgage company. However, with hard money lenders, they do not always have access to the secondary or investment property. They may require additional security. Most hard money loans are secured by a property with 30% to 50% equity, so the investor is well protected. They may require that you fill out documents giving up ownership of the secondary property in the event of default on the loan.
There are likely to be additional requirements to obtain a loan from private hard money lenders. Hard money lenders may be involved in more risk, but they still want to ensure that they get their investment back. A typical bank loan borrower looking to take out a business loan as to be 2 years in business, have at least $250,000 of annual revenue, have good personal and business credit and be cash flow positive. These requirements are generally the same for a private hard money lender, as well. They want to ensure that you have business knowledge and that you know what you are doing with the loan money.
Customers may also find more room for negotiations when it comes to a private hard money lender. When you work with a traditional mortgage company, their rates are often set. However, there may be some room for adjustment when working with private lenders. The hard money loan rates may be affected by things like differences in credit, the amount of cash flow positive and the yearly revenue of the company. A larger company with better financial success is likely to negotiate a lower interest rate on a hard money loan.
Owning a home is the American dream. However, mortgage companies often require payments for many years. This can prevent you from securing additional loans for things like secondary homes or investment properties. Hard money loans allow you to get the necessary funds for an investment property. These loans tend to be shorter term, have higher interest rates and require more business success than traditional mortgages do. The loan lender may also require higher amounts of equity, often in the form of a property.