Financing a home in Arizona can be difficult, especially with lenders tightening their financing criteria. This leaves countless buyers turning toward alternative financing options, one of which is hard money loans.

In this article, we'll cover the basics of hard money loans, how homebuyers can use this financing type, and the pros and cons.

What is an Arizona Hard Money Loan?

A hard money loan is a type of loan secured by an asset, which is usually the property being purchased. Hard money loans can be used for both commercial and residential properties. This type of financing isn't generally issued by a traditional financial institution. Instead, private investors or lenders are the ones facilitating the loan funding and setting the terms.

Similar to a conventional mortgage, hard money loans come with set terms, such as a fixed interest rate, repayment period, and default clauses. Unlike Fannie Mae and Freddie Mac loans, hard money loans aren't meant to be a long-term financing solution. A term of 12 months or less is common.

How Can Homebuyers Use Hard Money Loans?

Although homebuyers can use hard money loans to purchase property, this funding method is more widely used in a commercial setting. This is because hard money loans come with higher interest rates and quicker repayment periods.

However, homebuyers that are purchasing unique properties, such as a fixer upper, can benefit from hard money loans. Hard money lenders can be more lenient with their lending power. This means that homes that wouldn't qualify for a traditional mortgage, might qualify under a hard money loan.

Once the property is fixed up, homebuyers then refinance to a conventional mortgage. Despite the higher interest costs, utilizing a hard money loan might be non-negotiable for certain homebuyers set on purchasing a unique property.

What are the Pros and Cons of Hard Money Loans?

Hard money loans come with both pros and cons. First, hard money loans are flexible and can help you close on fast-moving or unique properties. Lenders have leniency in their underwriting policies and procedures, especially for commercial loans. Fix and flip, new construction, cash-out equity, and general commercial hard money loans are all available.

Hard money loans do come with cons that should be considered as well. The major disadvantage is the high interest rate. Hard money loans are riskier investments, meaning lenders will charge higher interest rates to offset the risk. Rates can be upwards of 10%. Another disadvantage is the timeframe. Hard money loans aren't long term. If your project gets delayed, your payments are still due.

Summary

Whether you are a real estate investor or a homebuyer, securing financing through financial institutions isn't always ideal. For commercial transactions, fast-moving properties, or unique homes, a hard money loan might be your best option.

Working with the right hard money lender can make all the difference. Our team at Easy Financing has over 16 years of experience helping all types of buyers secure real estate. Reach out today to set up your free consultation.