Are Hard Money Loans Only For Desperate People?
Some people believe that hard money loans are last resorts. According to this belief, someone would only apply for this type of loan because they cannot secure financing from a traditional institution. While there are situations when this kind of lender will approve a loan to someone going through a difficult financial time, that is more the exception than the rule.
When is a Lender Likely to Provide the Financing?
If you are attempting to fund a project involving commercial real estate, your personal financial situation may be less of an issue. The property’s current market value will be of greater importance. Lenders have the right to seize your property in the event you default on your loan.
Hard money lenders can work with you in a number of ways. For example, if you want to cash out, and refinance, your existing debt – that’s a common scenario. In some cases, borrowers need more money to finish their project and turn to a hard money lender for bridge funding.
Typical hard money lenders are reluctant to approve a loan when you are attempting to use your primary residence as the collateral. Hard money lenders are not legally allowed to lend on primary residences.
Most people who use hard money loans are entrepreneurs. Specifically, they have an idea for a short-term project that is likely to generate a great ROI. Since most hard money loans come with two-year terms and rarely exceed five years, this financing option is a good fit.
Consider an entrepreneur who has decided to purchase a residential or commercial property, make some upgrades, and then place the property back on the market. In the best-case scenario, the property will now generate enough money to repay the loan balance and leave the seller with a tidy profit. Part of that profit can be used as a down payment on another property while the remainder of the purchase price is given by the hard money lender. If the entrepreneur can find properties that can be potentially fix and flipped, it’s likely the hard money lender will continue to provide funding.
The key here is that the entrepreneur has a business plan on how the funds are to be used, and how the hard money lender will get his investment back. Hard money lenders care about one thing only: the collateral associated with the loan.
Remember that hard money loans are a way to achieve a goal without going through the hassle associated with securing a traditional mortgage.