Why Do Hard Money Lenders Exist?
Hard money lenders server a very specific group of people, i.e. real estate investors. Hard money lending is a form of short term lending, which is secured by real estate. Specifically, the people who use hard money loans are typically real estate investors – typically, those who are being denied a traditional loan due to stringent guidelines.
Hard money lenders exist because they are fast, and offer loans with little to no headaches. Hard money lenders have a streamlined application system. They expect collateral, and don’t look at your credit score. They focus on your experience, rather than your credit worthiness. If you have a checkered financial past, it’ll be easier to obtain financing by using a hard money loan rather than a conventional loan which is granted based on your credit report. Below are situations where hard money lenders fill a void that traditional lenders don’t touch:
Fix and Flip Loans
Most traditional lenders will not give you a loan for a fix and flip project. If the house is in poor condition, or there’s some other abnormality with the house, then a traditional lender will not give you funding. In addition, most fix and flip potential deals “go fast.” The seller is very motivated to sell the property, and will accept the first offer. Traditional lenders take forever, so by the time the loan is approved – you’ve already lost the property since someone paid cash for it. If you have a hard money lender on your side who can close a loan in 5-10 days, you can get the fix and flip property.
People With Bad Credit
Most traditional lenders look at a borrower’s credit report. They verify your income, and investigate past delinquencies. It means that someone with a checked credit history will have a difficult time, and in some cases never get approved. When this happens, your only option is to work with a hard money lender. While the interest rates for a hard money loan are higher than traditional loans – if the deal makes sense, it might make sense to take the money.
Sometimes, your project goes over-budget and as a result you need additional funding. Some traditional lenders will refuse, because the project isn’t completed. While this can be devastating, a hard money lender might be willing to lend you the funds. Hard money lenders are happy to give money to bridge the gap in funding, and can work with you to fill that void.