Hard money is one way of borrowing with using a traditional lender. Hard money loans come from individuals/private investors, who are lending money based off the property you use as collateral. When you need a loan ASAP, a traditional lender may not be quick enough. That’s where hard money comes into play. Below is an article on how hard money loans work.
What’s hard money?
Most traditional lenders require proof you can repay them back. Lenders are interested in things like credit scores, your income, and your ability to repay the loan as a whole. If you have a solid credit history, and the ability to repay the loan, then you’ll get approved.
It’s a slow process – even with great scores, and income. If you have negative items on your reports, then the process takes longer. You might not ever get approved.
How are hard money lenders different? They lend based on collateral you put up, to secure the loan. They aren’t concerned about your ability to repay the loan. They are concerned about your collateral – because if you fail to pay the loan back, they will take your collateral and sell it. The value of the collateral is the only thing important to the lender. Generally speaking, hard money loans are short term loans. You don’t want to keep them for an extended period of time due to the high interest rates on the loans.
Why should you use hard money?
Hard money has it’s uses. It’s for borrowers who, for one reason or another, are unable to get traditional funding when they need it. The bottom line is that hard money is available if you can’t turn to traditional lenders.
Hard money is fast: the lender is focused on collateral – not your financial capability to repay the loan, as a result – hard money loans close quicker than traditional loans. Lenders don’t focus on your income, bank statements etc. What they focus on is the value of the property, how long you need the loan for, and how you intend on repaying the loan. Once you have a relationship with the hard money lender – the process moves faster because there is trust.
Another reason why hard money loans are great is because of the flexibility they offer. Hard money loans can be more flexible than traditional loan agreements due to the fact they originate from private lenders. Because private lenders aren’t bound by corporate by-laws that institutions have, they can customize a “term sheet,” for you. For example, it might be possible to borrow against a different property you own – in order to fund a new project. At the end of the day, the hard money lender only cares about the property’s value. Traditional lenders won’t touch if you have negative items on your credit score, but hard money lenders don’t care at all.
When do hard money loans make sense
Hard money loans make the most sense for shorter terms. Fix and flip investors are a great example of candidates who benefit from hard money loans. Because fix and flip investors are “in and out,” of a property – they are able to quickly use the hard money to get into a property, fix it, and flip it – faster than a traditional bank would work.
Even though hard money has benefits, it has many drawbacks as well. Remember, hard money loans are secured by property. It means if you don’t pay the loan, you lose the property. The lender has the right to liquidate the property to recoup his investment. In addition, hard money loans are expensive. If you qualify for other forms of financing – you should probably consider that because it’ll be cheaper than a hard money loan.
If you’re sure you need a hard money loan, we encourage you to contact Delancey Street. As a premier nationwide lender, we understand the challenges you face – and are here to help you.