Real estate investors rely on hard money loans for quick access to funds to purchase property. The hard money loan is considered to be a very attractive lending option for those who aren’t able to secure a traditional loan. Traditional loans can contain more stringent requirements than hard money loans. One of the most common questions asked by borrowers if a hard money loan is considered the same as cash.
What is hard money?
Hard money loans are interest only loans that are used by real estate investors to secure a property. These hard money loans are usually offered at a fraction of the complete value of the property. The property is treated as collateral. The value of the property used as collateral takes precedence over the person’s credit score and ability to repay the loan back. The loan is considered to be a short-term loan. People with credit challenges may also view this as a lending option.
Is a hard money loan considered same as cash?
A hard money loan is not the same as a cash. The hard money loan is based on the property or collateral’s value. Hard money is viewed as a loan because a property is used to secure the funds. The all-cash offer that may be on the table may provide cash to the seller. Just because the cash is used to purchase the property doesn’t mean that hard money made available to a lender wasn’t used to acquire the property. Hard money provides cash to borrowers to complete the transaction with the seller.
Why do people use hard money loans?
Hard money loans provide flexible, fast money for investors. Short-term financing made available to investors come with less stringent qualifications. The loans are frequently used in scenarios where properties are being rehabbed in preparation for being sold to another party. Flexible terms like the ability to be able to pay only the interest on a loan is advantageous to those with less money on hand. The bureaucratic nature of the traditional lending process makes the hard money loan option more convenient for investors on a time crunch.
What happens if you default on a hard money loan?
All loans are subject to terms. Once the loan agreement is signed, the lender has the right to get the property if the borrower is unable to pay for a given reason. The foreclosure process allows the property to be sold. Proceeds from the sales transactions helps the lender recoup its losses. Foreclosures in a hard money loan agreement move on average much quicker than foreclosures in a conventional setting.
Hard money used as a tool
In many cases, a borrower relying on hard money is able to negotiate a lower price for a property. The money is tied up for a shorter period time with such an arrangement in place. The seller may see having access to funds in a shorter period of time as reason enough to lower the purchase price. With the opportunity to offer a much faster closing, motivated sellers are more likely to conduct business with an investor.
Higher interest rates are typically assigned to risky borrow profiles. These loans operate in the same manner; borrowers will pay much higher rates. These lending options offer quicker access to cash, but also expect the loans to be quickly repaid. As a short-term lending option, these loans are designed to be paid off in a matter of months. Fees for closing and origination may also be higher than those associated with a traditional property loan.
A hard money loan is much easier to secure than a conventional loan. Fewer lending requirements and less red tape make it a viable lending option for investors who need quick access to funds. Lenders rely on the property as collateral and provide the funding based off the potential resale value of the property. The loan is also an option for those with less than stellar credit as well those who may be pursuing another property simultaneously. The primary requirement for securing a loan is the property’s value. Although cash is made available to the buyer, hard money is not considered cash or treated as a cash offer when acquiring a property.
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