How is a hard money lender different from a traditional lender
The main difference between traditional lenders and hard money lenders is the fact hard money lenders are asset based lenders. They focus on the asset associated with the loan. In contrast, traditional banks focus on the borrowers credit and liquidity. It’s critical to remember hard money loans aren’t good for the long run. The objective of a hard money loan is to be a short term loan that gets you the home you’re trying to purchase. Hard money lenders focus on short term loans that reap greater ROI than leaving the money in the bank. If you are unable to repay the loan you took, then the company you borrowed from can take over your property in order to repay his/her loan.
When’s a good time to consider getting a hard money loan
Private money loans are used as investment tools by investors. Here are some examples where hard money is good, such as:
Unable to find financing elsewhere. Funding real estate investments is complicated. Traditional mortgages are tough to acquire under normal situations. Banks are very cautious of making loans for investments, instead of loans for primary residences. Because of this, if you’re looking for investment capital – then you’ll probably have to get a loan from a hard money lender.
You have a bad credit . Hard money loans are based off the collateral of their investment, not your ability to repay. Loans made to customers – as opposed to private money lenders – are based off your ability to repay the loan. This means if you’ve got a bad credit history or no steady income – then you may not get approved for a loan. You need capital. Hard money loans are great so you can get money ASAP. Conventional loans take time. Hard money is extremely fast. If you need to capitalize on an opportunity immediately, then it is possible to get a hard money loan. If you can wait a few weeks, then it is far better to find a hard money loan.
Hard money lenders can help fund your next loan
Hard money lenders work a very specific group of individuals, i.e. real estate investors. Hard money lending is a form of bridge term financing, which is secured by real estate. Specifically, the men and women who use hard money loans are generally real estate investors – typically, those who are being denied a traditional loan as a result of stringent guidelines.
Hard money lenders exist because they are fast, and offer loans with little to no headaches. Hard money lenders have a relatively simple application system. They anticipate collateral and don’t look at your credit rating. They focus on your expertise, rather than your credit worthiness. If you have a checkered financial past, it will be easier to obtain financing by using a hard money loan as opposed to a conventional loan that’s granted based on your credit report. Below are scenarios where hard money lenders fill a void that conventional lenders do not touch:
Most traditional lenders will not give you a loan to get a fix and flip job. If the house is in bad condition, or there is some other abnormality with the home, then a traditional lender won’t give you funding. Additionally, most fix and flip potential deals”go fast.” The seller is extremely motivated to sell the property, and will accept the first deal. Traditional lenders take forever, so by the time the loan is approved – you have already lost the property since someone paid money for it. For those who have a hard money lender on your side who will close a loan in 5-10 days, you can get the fix and flip property.
Hard money loans are essentially bridge loans
Sometimes, your job goes over-budget and as a result you need additional funds. Some conventional lenders will deny, because the job isn’t finished. While this can be devastating, a hard money lender may be willing to lend you the money. Hard money lenders are happy to give money to bridge the gap in funding, and can work with you to fill this void.
Hard money gives you bargaining power
If you’re a real estate agent, more funding means more deals. By using outside hard money, you can focus on more simultaneous deals that would otherwise not be possible. Conventional lenders consider your entire debt to income ratio, and will not give you funding if they believe you have a lot of existing debt. In contrast, a hard money lender does not care about your income, nor do they care about your present debt. The one thing a hard money lender will fixate on is the value of your asset. Hard money loans are great for developers who need funds to get their project started but aren’t a fantastic fit for conventional lenders. Remember, traditional lenders are not interested in taking on additional risks – they legally are not allowed to following the 2008 economic crisis. Hard money loans typically finalize faster than traditional loans from a bank, which permits you to move faster. Many property owners will be willing to work on their cost and willing to cut you some slack – if you can show you can pay immediately. Many real estate investors that rely on traditional lenders cannot move fast due to delays due to the strict guidelines conventional lenders have. Speed and unlimited money, is why hard money is great.