A non-traditional method to obtain funds is through a hard money loan. This sort of loan is provided by investors who provide lending based on property collateral. When a man or woman is unable to get a loan through conventional means, the hard money approach may be the only option. The following explains how this sort of loan works.
What is a Hard Money Loan?
The majority of loans are created based on repayment ability. This is dependent on a person’s income and credit rating. If the individual has has a good history of borrowing money and paying it back, then that person will likely get the loan they need. Traditional lenders can be quite slow to accept loans, even if the applicant has an exceptional income and solid credit score. Someone having a negative credit history or an low-income might never receive a loan approval.
A hard money lender offers a loan based on the collateral, a person provides, such as a home or property. This loan is typically easier to get because it is not based on the ability to repay it. If the borrower can’t pay the money back, the lender only requires the security and sells it to recover their funds. The collateral has a greater value than the borrower’s credit rating or income. Since the rate of interest for a hard money loan is significantly higher than a conventional loan, it’s practical for only a short time period, averaging between one to five years.
Why Get a Hard Money Loan?
With a higher rate of interest, a hard money loan may not seem like a good choice. For those who cannot qualify for a traditional loan, it will offer the following advantages:
• Fast money. A hard money loan closes quickly because the lender is not concerned with a borrower’s financial standing, only the security provided. Lenders also do not need to invest time in looking at bank statements or verifying a debtor’s income. Once the connection has been established, the loan process can proceed smoothly, and the debtor will receive their money straight away.
• Flexibility. Since each hard money loan is assessed individually, the approach provides more flexibility than the traditional loan process. Depending on the borrower’s circumstances, repayment schedules can be adjusted to better suit both parties. This is because there’s a direct relationship between lender and borrower, rather than borrower and a business with strict rules.
• Approval. The most important concern for hard money lenders is collateral. Most aren’t concerned with a borrower’s credit history, though some may ask general financial questions throughout the acceptance procedure. Lenders like a low loan-to-value ratio as this will allow them to quickly sell a property if the borrower defaults.
When Does it Make Sense to Use Hard Money?
Hard money is best suited as a short-term loan. This sort of financing is often used by those who purchase and “flip” houses. It makes sense as the borrower only occupies the property long enough to increase its value. If the individual wishes to stay there indefinitely, it is better to refinance.
Drawbacks of Using Hard Money
While hard money loans are generally easy to get, they are not an ideal solution. They are costly, and the plan has to work smoothly for all parties to profit. In addition, lenders may appreciate collateral property at a lower value than the borrower prefers. Borrowers should also consider other kinds of financing, which might help them come out ahead in the long run. A person may be eligible for an FHA loan even without a perfect credit history. Interest rates for hard money loans can encounter double digits, and the borrower may be made to pay an origination fee to close the loan.
How to Find Hard Money Lenders
Those who need to borrow money and want to obtain a hard money loan may reach out to local real estate investor groups and brokers for the names of lenders who operate based on security. Talking with a few distinct lenders and building strong relationships is the road to getting funds quickly when they’re needed.