While most loans require some type of proof that they can be repaid, this isn’t the case with hard money loans. Traditional lenders require a descent credit score, and sometimes they can still be painfully slow even when you’re approved.
Hard money loans are based on the secured collateral. In the case where you cannot pay back your loan, the lender will simply take your collateral and sell it. The loans have a quick approval rate, and terms can be from one to five years.
There are many pros and cons of hard money loans. Some of the pros:
Speed: Because the loans only need collateral, hard money loans are often closed a lot quicker than traditional loans. Because income verification and credit history isn’t necessary, the process tends to move a lot faster. In many cases, you could be approved within 24-48 hours due to the lack of paperwork needed for the process.
Flexibility: The agreements are more flexible because there is no standard underwriting process. Each deal is evaluated on an individual basis. Depending on the situation, certain terms can be tweaked to the benefit of the loan recipient. The ability to negotiate and renegotiate if needed makes it easier to fit your needs. Remember, with hard money loans, you aren’t dealing with strict lenders with stringent terms.
Approval: The most important part of the hard money loan process is having collateral. Above all, the lender cares about the value of your collateral. Your credit score is far less important. With hard money lending, loan to value ratio can be 50% to 70%. So your collateral has to be significant in order for the lender to have a good shot of recouping their money if the loan is defaulted.
Hard money loans make a great deal of sense if you own a business that flips and fixes houses. In this case, you can take out a short-term loan and once the property is sold within a year, the lender can be paid off.
These are the drawbacks of hard money loans:
High Interest: One of the biggest cons of hard money loans is the interest, which may be considerably higher than regular loans. In some cases, the interest can be double-digit. High interest is due to the focus being on the property rather than the lender. The high interest could also be overwhelming. It is imperative to calculate your finances in the long run to determine whether or not you will have the money to cover the loan.
Short Term Only: Hard money loans are generally available from six months to 5 years. The loans are private and they are generally used only for building renovations or property flips. The loan borrower should also be aware that the lender may want the entire balance of the loan paid in full within the one to five year range. But if you have a piece of property you are trying to get ready to sell, the hard money loan will allow time for the property value to boost. This way, the loan can be paid back while earning a profit.
If you are in need of a hard money loan, consider the pros and cons. Remember, it’s only a temporary loan that should be used for specific needs.