There are a lot of different loan options out there that you may not be familiar with. Balloon loans, bridge loans, and many, many more loan types are out there, each offering a different set of advantages and disadvantages, each one potentially just what you're looking for. If you're thinking of taking out a mortgage, it may be best to learn a little bit about the alternate options you can choose from before settling on a loan type.
Hard Money Loans
A hard money loan is a type of asset-based loan in which the borrower uses the value of his or her real estate in order to secure a loan. That is, the collateral for the loan is the property itself. Such loans are rarely given by traditional lending institutions, for a number of reasons. These loans are similar to bridge loans, with a few key differences, notably that bridge loans often apply to real estate properties which are in transition. Hard money loans are often used to avoid foreclosure or bankruptcy.
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One of the major benefits of this type of loan is that credit score is virtually irrelevant. Because the loan is guaranteed by the property itself, the lender is less interested in your credit history. Additionally, such loans have a low loan-to-value ratio as an added benefit to the lender. A loan-to-value ratio describes the amount of money loaned to the value of the collateral. Usually, a hard money loan has a loan-to-value ratio of about 60% to 70%. If you had a ratio of 65%, then a property valued at $100,000 would guarantee a loan of $65,000.
This lending business took a hit in the late 1980s as the real estate market collapsed, partially due to the overestimation of the value of properties used as collateral in such loans. Because of this, the loan-to-value ratio was lowered significantly to allow for added security to the lender. Hard money loans are largely unregulated, and are provided by commercial lending firms rather than traditional lending institutions.
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