hard money loans versus bank loans

Hard money loans are different than bank loans. The way risk is assessed, the documents required and the loan terms are often different and more flexible in comparison to bank loans. This allows the hard money lender, such as ourselves, to be more creative in creating the financing solution you need.

1. Interest Rates Are Higher

Interest rates for hard money loans are going to be higher than bank loans. When you borrow money, you will pay back the original amount loaned, called the principal, plus the interest. The interest is what it cost you to borrow the money.

Most hard money loans have interest only payments. This means that you would be paying the cost to borrow the money on a monthly basis and not paying any of the principal. The principal is due in the form of a balloon payment, more on that later. Having interest only payments allows your monthly payment to be manageable.

2. Your Loan-to-Value-Ratio Is A Key Factor To Getting Loan Approval

Loan-To-Value Ratio, or LTV, is an important element in evaluating risk. Let’s start out first with how to calculate LTV. It really is pretty simple. You take the amount of the loan and divide it by the total value of the securing property.

So let’s say for example that a borrower is buying an investment property worth $100,000. They have $20,000 for a down payment. That means they will need a hard money loan for $80,000. What then is your LTV? You will simply calculate 80,000/100,000 = 0.80. (Loan Amount/Home Value=LTV). Your LTV is 80%!

It is important to note that the home value is not what the borrower is purchasing the house for or what the house was listed for on the market. The home value is the appraised or current market value.

The higher the LTV, the higher the risk for the loan; the investor will have to lend larger sums of money. This is usually due to the fact that borrowers with high LTV properties have less invested in that property. Take the above example, if a borrower only has $20,000 of their own money invested in a property they are more likely to just walk away if financial crisis hits. However, if they have $50,000 invested, making the LTV 50%, they are less likely to walk away. It’s all about how much “skin you have in the game”.

3. There Will Be A Balloon Payment

As discussed earlier, the monthly payments made are interest only and do not include any of the principal. At the end of your loan term the principal is due in the form of a balloon payment. This means that the entire loan amount is due in one giant payment. Usually loans are refinanced or properties sold in order to pay the loan in full.

4. You Can Have A Low Credit Score

Credit scores can be impacted for a variety of reasons. Not paying on your credit cards or loans, closing accounts, opening to many accounts, charge offs, accounts sent to collections, high balances, foreclosure, bankruptcy and judgments to name a few.

Some impacting factors can hurt your credit score for up to 10 years. A lot can change for the better in 10 years and ARC Private Lending recognizes that. Although we use your credit as a factor in assessing risk we give you the opportunity to explain what happened to cause your low score.

Bad credit does not equal loan denial with ARC Private Lending. This is why your Loan-To-Value Ratio as stated above is so important. If your credit score is low but the LTV is right, you have a good chance of getting loan approval!!

5. Our Lenders Are Everyday People

ARC Private Lending works with over 400 private investors. Our Investors are a diverse group of individuals from all walks of life who have extra cash they are willing to lend. They could be your neighbor, a teacher, a college student, a retired woman, your local attorney or veterinarian.

As a hard money lender we work with investors that can see the bigger picture, that people are more than just their credit score or income documentation. They are everyday people like me and you.

6. There Is More Than One Reason To Get A Hard Money Loan

Hard money loans are there for people that cannot get a loan at a bank. They either have bad credit, little to no income documentation or problems with the property they are trying to use as security for the loan. Sometimes we have customers who have good credit, plenty of income documentation and no issues with their property but have had late mortgage payments, a past bankruptcy or foreclosure and for that reason the bank won’t lend to them.

Life happens. We have had people come to us that have had a loved one become ill. Medical bills started to pile up, income was lost because they could no longer work, other debt obligations had to take a back seat to more pressing bills. When the situation started to turn around for the better, income returned to normal, there was just no way to get ahead. People in this situation have come to us to get a loan to get caught up and back on track.

We have helped people who owed a substantial amount to the IRS. People that wanted to Fix and Flip Properties or complete deffered maintenance on a property in order to get a bank loan. We have helped peopled who found the perfect house for a rental, couldn’t pass the house up, get financing because they could not qualify for a bank loan.

There are many reasons a hard money loan might fit an individuals need. If you are unsure if your situation would work reach out to us and find out. We can give you the opportunity to get on track with your financial goals when the bank won’t!!!

Using ARC Private Lending Loan Officers will enable you to get advice on the best loan for your needs. Contact us today to find out about our services.