Hard Money Loan Costs
Hard money loans are expensive. They are designed to be temporary, and the interest rate on a hard money loan gives you an incentive to move on as quickly as possible.
First, interest rates are generally higher on a hard money loan. You should not be surprised to pay more than 10% APR, and you can easily pay several times that. A hard money loan should be used to help with a temporary need, not as something you’ll keep around forever.
You may not even have the choice to keep a hard money loan going for long. Most loans require you to repay in full within one to five years, so you have to plan ahead.
In addition to higher interest rates, you’ll often pay more points to get a hard money loan. Five points or more would be reasonable, but you’d need a good reason to pay that much on other loans. Again, a hard money loan is a shorter-term loan, so you’ll amortize those points over a shorter period of time. They drive up your borrowing costs.
Credit for a Hard Money Loan
You may not need good credit or any credit to qualify for a hard money loan. However, many lenders will pull your credit and look for red flags. Yes, they can sell the asset and get their money back, but they’d rather not do that. If you have bad credit, you may not qualify for a hard money loan - even if it’s a safe bet for the lender.
Low Loan to Value Ratios
Loan to value ratios are generally more conservative with a hard money loan. Despite claims about 'little or no money down', you’ll need assets to qualify for a hard money loan. It may be possible to pledge different types of assets to qualify - such as personal assets or other properties - but you need sufficient equity in those assets.
As a general rule of thumb, expect loan to value ratios between 50% and 70%. Lenders want extra assurance that they’ll get their money back by selling assets.