Real estate buyers and general consumers need to know what they’re getting into when they decide to buy a property through a hard money loan instead of a mortgage. They need to carefully look into hard money strategies. A hard money loan can sometimes be preferable to a mortgage because independent lenders or investors can approve borrowers a lot quicker than banks or traditional lenders would for mortgages. Usually, instead of getting approved for a hard money loan on the basis of their personal or business credit scores, borrowers are granted hard money loans based on the appraised value of the property they wish to purchase, and how much they can put into a down payment. The lender usually will want to know about the borrower’s income and what they plan to do with the property, but generally, the property itself is what secures the loan, and the lender will usually loan out about 75% to 80% of its appraised value.

But what borrowers need to be careful of is that hard money loans usually have considerably higher interest rates than mortgages because they are a little riskier for lenders. They also are for much shorter periods than mortgages and need to have both interest and principal paid off by their final date. For those reasons, borrowers need to have a strategy for paying off the loan so they don’t end up having to forfeit the property or any personal collateral if the borrower required any personal guarantee as part of the loan contract. There are a few ways hard money loans can be paid off.

Selling The Property As Soon As Possible

Usually, the people who use hard money loans are people who know what the residential real estate market is like and plan on rehabbing old homes or building new ones. If homes are selling quickly in the market, borrowers who flip homes are likely to be able to pay off their loans and make a profit off the sale. If the property doesn’t sell right away, the borrower may want to consider recouping its value by turning it into a rental property.

Refinancing The Hard Money Loan Through Another Loan On The Property

If the plan isn’t to sell the property right away, or that plan didn’t work out for the borrower, they may want to pay off the hard money loan by securing another loan with the property. With the property in their possession, a borrower may be able to get a conventional mortgage on it. If they can’t get one from the bank, a peer-to-peer lending agency or a manual underwriting mortgage company may be able to work with them. If not, they may be able to get another longer alternative real estate loan like a bridge loan. Refinancing through one of these loans usually is recommended if borrowers are leasing the property and anticipate it will take a little longer to fill vacancies.

Paying Off Using Other Collateral

Borrowers always need to have a plan C in case things ultimately go south they cannot sell the property or refinance the loan directly. If the borrower owns a house and their equity in it is enough to cover the hard money loan principal and remaining interest payments, options could include using a home equity loan or line of credit to pay it off. But they do need to make sure the lender has not put any liens on their home as a personal guarantee if they decide to go this route. If that doesn’t work out, the borrower should look into other sources of cash reserves or secured loans they could use to pay off the loan. But if they cannot do that, they may need to check with the lender to see if they would simply be willing to take over the deed to the property.