Before we discuss who is funding the hard money loans, it is important that you have a full understanding of what these loans entail. Unlike the traditional loans you can get at the local bank, the hard money loans are easier to get but you should be aware of the good and the bad before jumping in with both feet. The hard money loan is also referred to as a bridge loan, basically fast money used for a number of financial investments. This is the preferred loan for real estate developers and house flippers, but it is gaining popularity in smaller circles too.
Let’s discuss more about the hard money loans and who is funding these type of short-term lending instruments.
Who Funds Hard Money Loans?
The hard money loan is unique in and of itself because it is funded by private investors. Instead of going to the neighborhood financial institution, investors will be bidding on your financial request. Because the bank is removed from the equation, the terms of the loan will be determined by these private investors who are looking for nothing more that a quick profit on their money. Instead of leaving their cash in the bank to grow at one percent a year, they can put it up by way of the hard money loan and get a huge return on their investment in less time.
Speak with your local realtors about the best way to reach out to these investors in your area so you can apply for the hard money loan on your own. There are investors all over the country looking for a quick return on their capital.
Criteria To Get Approval for Hard Money Loans
Whether you are looking to renovate a property to sell or are flipping a house in a month, the investors for the hard money loans are looking at your ability to pay back the loan. It doesn’t matter what project you have lined up and the need for the cash, getting approval for the hard money loan is not going to be based on your creditworthiness. The hard money lender looks at the value of the property itself and considers the ARV, or after repair value.
By determining what the property is valued at after the repair, the investor can better determine if the loan is worth the risk. Accuracy with property value and sale date help move the loan process along easier.
The Cons of the Hard Money Loans
Although the hard money loan is not the perfect lending solution for those in need of quick cash, it is fast and convenient. That being said, there is a price to pay for that convenience, and it comes in the way of a slightly higher interest rate. Although higher than a conventional loan, the money can be paid back long before a local bank even decides if the borrower is worthy. The terms of the hard money loan are shorter because these private investors want to see a return fast.
When the borrower has a clear understanding of when this property is going to be profitable, then paying back the loan with shorter terms is usually not an issue.
The Pros of the Hard Money Loans
The benefits of the hard money loan are numerous. Not dealing with the endless hoops to jump through at the bank is usually enough, but borrowers love the convenience of these type loans. Instead of waiting months for the bank to fund a traditional loan, investors provide funding for hard money loans in weeks. That can be huge when timelines for projects come into play. Another benefit of the hard money loan is the flexibility of the terms. Private lenders are more likely to negotiate and allow wiggle room for the borrower, tailoring the repayment schedule to their needs.
The one thing these investors are really concerned about is the collateral, and that is usually the property itself. These private lenders often allow a bit of leeway with the collateral too, attaching unique terms you couldn’t find in a traditional loan. If the lender feels the property value is overstated, they may simply ask the borrower to secure their residential property or retirement account as part of the collateral.
Bottom Line With Hard Money Loans
When you need capital in a pinch and don’t have the time or patience to jump throw the endless hoops at the local bank, the hard money loan may be the perfect fit. If you need funding fast and don’t need the aggravation of miles of red tape, just be aware of the fine details of the loan.
If you’re comfortable with the interest rate, loan terms, and fees, this might be the perfect financial vehicle for your needs.