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. Since the regulations associated with seizing commercial real estate that’s pledged as collateral are less complicated, the lender may be willing to take a chance.
The lender may also be willing to work with you if the purpose of the loan is to refinance current debt associated with your commercial building project. This is often the case when the bridge loan you secured to start the project is about to reach the settlement date. Refinancing and using the money to pay off the previous debt buys more time to either sell the property to an interested buyer or allow it to begin generating the revenue needed to eventually pay off the amount owed.
How About Primary Residential Properties?
The typical hard money lender is reluctant to approve a loan when you are attempting to use your primary residence as the collateral. Part of the reason is that hard money lenders are usually individuals or smaller groups rather than large corporations. They don’t like the idea of having to evict someone if the debtor defaults on the loan.
Another factor has to do with the time and expense associated with foreclosing on a private residence. Even when there is no doubt that you defaulted on the loan, the process of gaining control of the property, getting you and your family out of the home, and doing whatever it takes to prepare the property for resale can be complicated. That’s partly due to the regulations related to residential foreclosures and partly due to the expense of preparing the property for listing.
So Who Does Use Hard Money Loans?
Most seekers of hard loans are entrepreneurs. Specifically, they have an idea for a short-term project that is likely to generate a hefty return sooner rather than later. Since most hard money loans come with two-year terms and rarely exceed five years, this financing option 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, that improved property will yield 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 supplied by the hard money lender. If the entrepreneur has a knack for finding properties with potential and flipping them quickly, the same lender will be happy to work with that client repeatedly.
The key here is that the entrepreneur has his or her finances in order. While there may be some issues that drove down the credit score, they happened several years ago. What the lender sees on the applicant’s credit reports is plenty of positive comments over the last few years. The applicant doesn’t have much in the way of debt, makes payments on time, and in general does a good job managing money. The fact the applicant is doing fine now matters more than the events of several years back that are still impacting the credit score.
Hard money lenders sometimes approve loans when applicants have some other type of project in mind. For example, it’s not unusual for a borrower to use the funds to make investments in stocks or bonds. Assuming the investment has a good chance of generating a reasonable return before the loan’s settlement date, the investor can set aside those returns in some type of interest-bearing account and have the cash on hand to finish paying off the loan.
Keep in mind the investor/applicant still needs to provide some type of collateral. Lenders who would balk at accepting the applicant’s primary residence as security would usually be fine with the pledging of a second home, a tract of land, or some other type of real estate. As long as the equity in the secondary property is sufficient to cover the total loan, there’s a good chance of being approved.
Remember that hard money loans are a way to achieve a goal without going through the hassle associated with securing a traditional mortgage or having to use cash reserves. People who are reliable and manage their money responsibly are great candidates for this type of financing. This is true even if their credit scores still reflect rough times from several years ago. If you have an idea and need financing to get it off the ground, consider this option. It could be the best move you ever make.