Not all home loans are created equal. While 70% of homebuyers get financial help in the form of a home loan, not all can get a standard, 30-year, low-interest-rate mortgage.
For the ones who qualify, and plan to hold the loan for at least a few years, a traditional mortgage is a great option. But many people are finding it increasingly difficult to secure a traditional mortgage, as many people don’t have a standard, two-year work history.
Rather, more people are moving into self-employment, complicating the home loan process. Luckily, there are owner-occupied hard money loans available, to help those needing to get into a home now, who may have poor credit or a difficult-to-document source of income.
Want to know if buying a home with a hard money loan is a good idea? Keep reading below to find out now.
In this article
1. Owner Occupied Hard Money Loans are Hard to Find
Hard money loans exist for businesses and investors, not for consumers. They are intended to be fast financing opportunities on a short-term scale, helping businesses and investors acquire deals before they’re gone.
Real estate investors will often use hard money loans to buy an outdated house, fix it up in just a few months, and sell the property for a profit, paying off the loan.
Hard money lenders focus on these commercial loans, as they’re generally safer. The loans rely on the value of the property, or the future value after it’s renovated. The track record of the investor or business is also taken into consideration.
But consumer-focused hard money loans are rare. There’s a lot more fine print to pay attention to, and most lenders avoid them. Some hard money lenders do offer primary residence hard money loans, for those with a complicated work and credit situation, or who may need financial support.
2. Hard Money Loans are Short-Term
Hard money loans, whether extended to a consumer or investor, are meant to be short-term loans. These are not long-term financing solutions, like a 30-year mortgage.
Most hard money loans are off a 12-month repayment period. Rarely do hard money loans extend the past timeline.
So while you can find hard money loans for consumers looking to occupy the property, this type of loan is to help you acquire the property temporarily, while you work out your long-term financing.
Even if you can get a hard money loan with a longer term, the goal should always be to pay it back as soon as possible. Those who get a 10-year or longer almost always pay it back ahead of time, in which there is no prepayment penalty.
3. Can Use as a Bridge Loan
Consumer hard money loans are typically used as bridge loans. Bridge loans are “in-between” financing options that help you get from one long-term loan to the next.
For example, say you want to buy a new house and move in before selling your old house. It’s complicated because most people will need the equity in their current home to purchase the new property.
But buying first can ensure you have a place to go once you sell, which is especially important in today’s competitive market.
So before you list your home for sale, you apply for a hard money loan, get approved within a week, and start searching for a home. Once you are all moved in, you can stage the old house and ensure you get top dollar from the sale.
The entire moving process becomes much less stressful with a bridge loan in place.
4. Can Buy a Single or Multi-Family Property
With owner-occupied hard money loans, you aren’t limited to a single-unit property. You can either buy a single-family home, duplex, triplex, or quadplex.
In theory, you could buy your new home and an investment property all at the same time. You could move into one unit, renting out the rest. The cash flow you earn from collecting rent can then be used to make payments on your hard money loan until you transition to long-term financing, which should yield lower monthly payments.
5. Accessible Borrower Requirements
One of the biggest benefits of hard money loans is that they offer flexible requirements for approval since these are private lenders, not corporate banks. For example, your credit score isn’t a big factor. You can have a very low score and still get a hard money loan.
Likewise, you could have had a recent foreclosure or bankruptcy and still qualify. So long as you currently have income, a hard money lender will be willing to evaluate and work with your situation. You just need to prove that you have the means of paying back the loan.
6. Higher Interest Rates
All of these benefits come at a cost. Interest rates on hard money loans will be at least 10%, with many lenders charging upwards of 20%.
High-interest rates mean they don’t work as long-term financing options. The high mortgage payments should be manageable for a few months, but you should always be working on securing low-interest, long-term financing.
Otherwise, you could be losing thousands of dollars per year.
7. Can Get an Owner Occupied Second Mortgage
Most people use an owner-occupied hard money loan to acquire a new property. But you can also use it as a second mortgage. It essentially acts as a home equity loan, giving you fast access to your equity when you need it most.
Investors will use this to acquire a new property, while consumers often use it to consolidate debt or pay important legal or medical expenses.
Hard Money Loans as a Short-Term Tool
As you learn the process of managing finances and working towards a stable income and financial situation, an owner-occupied hard money loan can be a great tool.
Just remember that this tool, although powerful, isn’t only meant for a short period. You should always be working towards the next step, which is likely a long-term mortgage with a much lower interest rate.
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