Finding a mortgage from a traditional lender is a real hassle, especially if you have a questionable, or extremely poor, credit history. With a low credit score, it can literally take you weeks or months to be approved for mortgage. Even if you have a good credit history, it can still take some weeks for the process – beginning to end. It does not matter that sometimes you’re in severe need of quick money. The process takes time – end of story.
Hard money lenders, on the other hand, consider the collateral you’re giving up – as opposed to your financial capability to pay the loan back. Hard money loans require you to put up collateral – incase you default on the loan. Hard money loans are usually meant to help businesses financially, or to help businesses buy land/property. If you neglect to repay the money given to you, then the hard money lender who gave you the money will possess the collateral and sell it to get back their money. Lenders prefer not to take possession of your land – they’d rather get their loan repaid.
Hard money loans are most convenient and valuable to investors who want to renovate, or improve, a real estate property prior to selling it at a higher price. Real estate investors generate an ROI and repay the borrowed cash within a short period of time.
Hard money loans, like any other loan, come with their own advantages and disadvantages. This article discusses some of the pros and cons of hard money loans.
Hard money loans have short approval timelines
Hard money lenders are not concerned about your credit rating. Hard money lenders are more concerned about the collateral and will process your loan quickly if your collateral justifies the loan. They only care about the collateral. It’s important to be aware that hard money lenders aren’t always interested in taking possession of your property. The more information you provide about the value of the property, it’s initial cost, and after repair value – the faster they can process your hard money application.
Unlike the standard loans, hard money loans arrangements and provisions are flexible. Instead of handling a large corporation, you’ll be speaking to an individual who is prepared to assist you create the best repayment plan. They do not adhere to a standardized set of guidelines when setting up your loan repayment schedule. Lenders are extremely flexible, and work with you to give you the plan that works best. That means you can negotiate a flexible timeline, and negotiate every single variable of the loan. Each lender is different, so if one lender is being difficult – you can go to another one.
In regards to borrowing a hard money loan, the lender is most concentrated on security of the loan. If you would like to invest in real estate, the lender will give you a loan value as much as 70-80% the home. In case you have other financial assets to place as collateral, the lender will also consider its worth before approving your loan.
In case you have any issues with your credit history, it won’t be that significant. Some lenders don’t even look at your credit score.
In terms of loan-to-value ratios, hard money lenders keep them to the minimum with the highest being between 50 and 70 percent. They do this to give themselves a better prospect of getting their money back should they have to sell the property after your inability to pay the loan.
You can apply and get a hard money loan in a matter of weeks. This is valuable, especially to borrowers looking to invest in mortgages. The buyer will not wait too long to acquire the cash he or she wants to pay off a hot potential deal. Traditional loans involve a much longer procedure and take time to be approved.
Disadvantages of Hard Money Loans
Unlike conventional loans that take longer to be paid, hard money loans have been designed as a short term lending solution. This usually means that you will need to repay the loan in the shortest period possible, prior to the creditors repossessing your property. If you don’t fulfill this condition, the lending institution will take your home and sell it – in order to get their cash back.
In contrast to traditional loans, hard money loans tend to be more expensive. In addition to the loan origination, you’ll also cover closing and servicing expenses. If you take a hard money loan on a mortgage, it can cost you 10 percent more than it would have on the standard loans. Obviously, hard money loans are much convenient.
The rate of interest for repaying the hard money loan is also high because the lenders are facing higher risks when lending you the loan. The interest rates usually range between 9 and 14 percent.
Requirement of Equity
Before giving you a hard money loan, lenders ask that you provide a down payment of up to 25-30 percent. This is supposed to function as an incentive to motivate you to stick to the arrangement. This is because they attempt as much as possible to help keep you thinking about paying back their money. It also helps the creditor to tie you to the contract even when you realize you’re making a loss.
Before committing to a hard money loan, you must first assess all the available lenders, their prices, and conditions. You should also consider the benefits and drawbacks of hard money loans before applying for one.