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HML: The Definition and What You Need To Know
Hard money loans allow you to jumpstart a project. Understanding what the HML definition encompasses will prepare you to decide if one could benefit you.
Madison Clifton
Jun 25, 2019
When investing in real estate you can be passive or active. If you are the go-getter that likes to renovate properties or flip houses to make a profit you may have heard of HML, or hard money loans. You might have even considered one before. These loans can be exactly what you need to jumpstart a project, but like everything else do have their downfalls. Understanding everything that the HML definition encompasses will get you on track to decide if a hard money loan is right for you.
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What are Hard Money Loans?
The short, sweet and simple HML definition is: short term loans used by investors to finance a project. Now, let’s get into the details. Hard money loans are loans that you are able to get quickly with very little, or no hassle at all. This is because the ability to get these loans is not based on credit. While lenders still may ask for your credit score and available income to repay a loan, this is not what approval for the loan is based on. Instead, lenders use the value of collateral you put forth. The value of the collateral is much more important to lenders than your financial position.
Hard money loans are most commonly used to flip a house, or make necessary improvements in order to sell a house. Therefore, many people use the property they are intending to use the loan to improve as collateral for the loan. If you are unable to pay back the loan, the lender will simply take ownership of the collateral and sell it.
Pros
Have you found yourself debating between getting a conventional mortgage or a hard money loan? Well, there are a few upsides to hard money loans that are worth investigating.
Convenience. Applying for a traditional mortgage can be time consuming and take months to get approval. This is not optimal when working with investment properties. Investors risk losing potentially profitable investment opportunities if they have to wait months for a loan. Hard money loans fix this problem. They are able to be approved and have funds available to you in a matter of weeks.
Flexibility. Traditional banks do not offer hard money loans. Therefore when requesting a hard money loan you are not dealing with a large corporation that has a lot of red tape for you to cut through. You can often be dealing with an individual who is giving you the loan. Once a relationship is established with the individual terms of the loan can usually be discussed and negotiated. This offers flexibility with a loan that is difficult to find.
Cons
You may be thinking that hard money loans sound amazing at this point. While they can be just what you need to finish your investment project, they do have some significant downfalls.
High Costs. If you are approved for a hard money loan you can expect to pay at least 10% APR, and oftentimes much more than that. This is due to the nature of the loan. One of the most defining qualities of hard money loans outlined in the HML definition is the fact that it is a short term loan. The high APR is to incentivize you to pay the loan back as quickly as possible. Most hard money loans are required to be paid back in full within one to five years.
Low Loan to Value Ratio. Lenders want to absolutely sure that they get their money back if they do have to take ownership of your property. Due to this it is safe for you to expect your loan to value ratio to be between 50% and 70%. While it is most common for you to use the property you are planning to improve as collateral for the loan, it is an option to use other assets. You can put up personal assets or other properties, but you must have sufficient equity in those assets.
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When Should You Use a Hard Money Loan?
There is no doubt that hard money loans come with risks. While these risks can be high, it is important to remember what hard money loans are designed for. They are designed to turn around a property quickly and make for a fast sale. If you are looking at a lengthy and expensive remodel, you may want to consider a different loan. A HML is intended for a speedy project in which you can get your returns and pay back the loan as fast as possible. Hard money loans can make all the difference when trying to get a property ready and sell it fast. Just make sure you know your timeline on the project and have evaluated the risks.