When Should You Consider A Hard Money Loan To Buy A Primary Residence?
A hard money lender can offer home loans, but they aren't affiliated with banks like conventional mortgage lenders. They're typically used by home flippers who are able to profit from renovating and selling properties very quickly, but homebuyers looking for a primary residence can benefit from them as well. These loans are riskier for lenders than conventional mortgages, so interest rates are higher, and the loan term is often very short. However, homebuyers can use them to purchase a home in order to eventually refinance to a conventional mortgage. To learn why you'd want to use a hard money loan to purchase a home, what risks are involved and how to minimize these risks, read on.
When Should You Consider Using a Hard Money Loan to Buy a Home?
If you're having trouble being approved for a mortgage by conventional lenders, and you know that you'll be able to refinance your hard money loan within a year, then using one to buy a home can be a good option.
For example, conventional lenders often look at your employment history for the past two years when deciding whether or not to approve you for a mortgage. If you've gone through multiple periods of unemployment within the past two years, then they may not approve you. If you know that your current job is stable and you'll have a good employment record when it's time to refinance, then a hard money loan can be a way to bridge the gap.
Similarly, conventional lenders often don't approve mortgages for people who have filed for bankruptcy or who have had their homes foreclosed on in the past few years. These loans can be used to bridge this gap, as well, since it gives more time for the adverse event to age on your credit report.
What Are the Risks Associated With Using a Hard Money Loan for Your Home?
The primary risk of using a hard money loan to purchase a home is that they're very short-term loans. Most only last for 12 months, at which point the full amount of the home's purchase price is due to the lender. If you're still not able to qualify for a conventional mortgage by that point, you'll likely be in serious financial trouble — the lender may foreclose on your home and take possession of it.
You can reduce your risk by finding a loan with longer terms, as some lenders do offer them with terms longer than 12 months. You can also ask the lender what will happen if you're unable to refinance into a conventional mortgage. Some will let you refinance the hard money loan into another one instead of foreclosing on your home, which gives you some extra time. Keep in mind, however, that all hard money loans carry steeper interest rates than conventional mortgages due to the increased risk that they pose to the lender — you'll pay quite a bit in interest by staying on this type of loan for longer than you need to.
Overall, hard money loans are an excellent option for people who are temporarily having trouble being approved for a conventional mortgage. While these loans do pose some risks, you can minimize the risk by ensuring the lender will let you refinance the loan when it comes due. If you're continually being turned down by conventional lenders and you're certain that you'll be able to get a mortgage easily within the next year, using a hard money lender to purchase a home is a good option.