Connecticut, a thriving a bustling city, has been one of the top places where real estate investors would like to try their luck. However, because of the high prices on properties, some investors may not have sufficient cash for “flipping.” This is where hard money loans Connecticut comes in – they help investors with the funds needed.
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Hard Money Loans Connecticut: The Pros
Most people incorrectly interpret that availing for hard money loans is just financial assistance for investors with a not-so-good credit history. However, this is not an all-encompassing fact because availing of hard money loans can help borrowers with excellent or bad credit history alike. Below are the other advantages of utilizing a hard money loan:
• The approval process is quicker.
The timing is probably on the top of the list when talking about the advantage of availing of a hard money loan – it has a speedy approval process, and funding the loan would not take too long. In some instances, lenders can even approve the hard money loan application in only a day because lenders utilize straightforward assessment criteria to determine their decision.
They will assess the property, the borrower’s experience with the business he or she is venturing, the equity or the amount of down payment of the borrowers, as well as the exit strategy for the property.
Furthermore, they would also evaluate if the borrower can raise the money to pay the monthly payments.
• There are only minimal requirements.
As noted previously, hard money loan lenders frequently ask for only a few prerequisites compared to banks or traditional lenders. For the most part, they merely need to verify if the borrower has enough equity with their property, sufficient cash on hand to cover the monthly amortization, a feasible exit strategy, and, in certain situations, sufficient business experience.
Banks have a borrower qualification system that red flags certain difficulties and ultimately stops them from continuing the application. Loan modifications, current foreclosures, bankruptcies, and short sales are some of the examples.
Moreover, they are prohibited from lending to borrowers with a poor credit history. Most banks will refuse to lend to a client who already has four mortgages, regardless of whether the borrower has pristine credit and no poor credit history.
• They have some room for flexibility.
It is a good thing to note that because hard money loans Connecticut are pretty unconventional, they often do not follow a traditional underwriting process.
Borrowers will be able to observe that hard money loan agreements are typically more flexible than bank loan agreements. Rather than using traditional underwriting procedures, hard money loans Connecticut examines each transaction on an individual basis.
Thus, depending on the borrower’s circumstances (and bargaining abilities), he may be able to negotiate some loan terms, such as repayment schedules. In many circumstances, hard money loans Connecticut would sit down and discuss the application with the applicant – something you will not encounter with huge corporate lenders who adhere to their rigid standards to the letter.
• They fund fix and flip properties.
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The majority of conventional fix and flip houses are unoccupied or have an old structure. These are the reasons that contribute to their low prices and attraction to repair and flip investors. While they are riskier, hard money lenders understand that distressed and foreclosed homes typically offer higher profit margins. It is the reason why lenders are eager to finance them; they will look for the data and see the profit potential.
With banks, the situation is entirely different. They view risk as a significant concern, which is why they will not finance on a property that does not meet their lending standards.
Hard Money Loans Connecticut: The Cons
Now that you have learned about the most evident advantages of hard money loans, it is now time to proceed and explore its cons. Hard money loans Connecticut typically have their own sets of terms and conditions regarding the use of their cash and the payment schedule. If you are looking to avail of a hard money loan to fund your project, keep these drawbacks in mind.
• Borrowers are usually charged with a higher interest rate.
On top of the list are the higher interest rates associated with hard money loans. The rates would always be greater than a typical lender’s prime rate, such as a credit union and bank. For a first mortgage, a hard money loan has a rate that ranges between 8% and 11% per year. Interest rates for second mortgages are typically between 10% and 12% per annum.
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Interest rates for hard money loans Connecticut reflect the lender’s assessment of the loan’s risk. The higher the interest rate, the greater the lender’s risk. Bear in mind that hard money loan lenders do not require extensive proof regarding the borrower’s income and credit history. By itself, this aspect raises the risks they take when lending money.
• It requires a higher down payment.
The borrower should have a down payment which is usually within the minimum of 25% to 30%. Alternatively, if the borrower currently owns the property and is seeking a refinance, he must have between 25% and 30% equity in it.
Banks typically require a 20% down payment; however, some programs, such as FHA, require a substantially smaller down payment.
• There is a high risk of default or foreclosure.
The risk of foreclosure is a great possibility – regardless of whether a bank or a private lender is loaning the money. If the borrower does not make timely interest payments, fails to preserve or repair the property, or defaults on the loan, they may face foreclosure. However, lenders are aware that acquiring a home mid-rehab is extremely expensive.
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Hence, most will be willing to sit down and devise a strategy for completing the project in accordance with the original plan.
If you see that the project is not progressing as planned and you are concerned about default and foreclosure, address your concerns immediately to the lender. If you cease communicating with the lender, you increase your risk of losing the property.
• It is only a short term loan.
Another disadvantage of hard money loans is their short-term loan. Most lenders will only offer the borrower between one to three years before demanding complete payment. A longer period entails greater risk for the lender (as it is difficult to forecast interest rates at the end of your term).