As you explore your options for financing a project or purchase, it pays to consider every possible strategy. One that you may have overlooked is the hard money loan. As with any type of financing, this solution may be ideal for your purposes. It could also be one that you won’t use this time but might find helpful in the future. Here are some of the pros and cons you should know about these loans before making a decision about applying.
What is a Sacramento Hard Money Loan?
A Sacramento hard money loan is one of several asset-based lending arrangements found on the market. This simply means that you are pledging an asset as security for the loan. Typically, you retain control of that asset and may use it for the loan duration. In the event you default on the loan, the lender has the right to seize the asset and use it to settle the remaining balance. Once you pay off the loan in full, the lender relinquishes all claims to the asset, and you are free to retain it, sell it, or do whatever you like with it.
Your Credit and Receiving a Sacramento Hard Money Loan
One of the advantages of hard money loans is that lenders do not place much emphasis on your credit score. Since these loans are often offered by private investors or non-institutional financing companies, they use a different set of qualifications that you would find at a bank or credit union. What will be important is the market value of the asset you wish to use as security for the loan.
It’s not unusual for hard money lenders to require what is known as real property. Real property is usually identified as property that is fixed in place and is likely to remain so. For example, your home and the land where it’s built would qualify as real property. If you own undeveloped land, it would also be acceptable as security.
You may find that some lenders will accept other types of property as collateral. Assets like artwork, stock shares, or jewelry may be acceptable. The only way to know for sure is to ask in advance what sort of assets the lender is willing to accept.
If you do happen to own the right type of asset but have experienced some credit issues in the past, there’s a good chance that a lender who offers hard money loans will approve your application. This is true even if you have been turned down by more traditional lending institutions.
What About Interest Rates?
Generally speaking, the interest rates on hard money loans tend to be higher than on more traditional loans. This has to do with the amount of risk the lender is assuming in order to do business with the applicant. There is always the possibility of real property being damaged during some sort of natural catastrophe. The fact that the lender does not require a minimum credit rating like other lenders also increases the risk.
Before assuming that the rate of interest is going to be significantly more than other financing options, talk with a lender who offers hard money loans. You may find that the interest rate is lower than you expected. It might also compare favorably with some of the rates you see offered for bad credit loans.
Does Loan Duration Make a Difference?
Many entrepreneurs use Sacramento hard money loans when they expect to pay off the debt in a relatively short period of time. Maybe you have a project that is projected to begin generating returns within the next two years. In the interim, you have the resources to make the loan payments on time. Most loans of this type are structured for one or two years. There are some lenders who might go as long as five years, but that’s unusual.
If you will only need the money for a shorter term, this type of loan makes sense. When you believe it will take more than five years to settle the balance, looking into a different form of financing would be in your best interests.
How About a Down Payment or Equity in Your Pledged Asset?
A hard money loan arrangement will likely require that you either supply a down payment amounting to up to 25% of the loan amount or at least own 25% of the equity in the asset you are pledging. The ideal arrangement is to have real property that is totally unencumbered and use it as your pledged asset. If you are not sure how much equity you have in the property, find out before submitting an application.
Only you can determine if this type of loan is right for you. Talk with a lender and discuss what you want to accomplish with the money. Go over the terms carefully and make sure you can honor them. When used responsibly, a hard money loan provides the influx of cash you need when others will not work with you.