When in a financial crisis, you will need an alternative source of money to get you back on your feet. Loans are one way to obtain financing, and there are numerous lending institutions that could sort you out. Hard money loans are also a viable lending option that can help you fulfill your financial obligations. However, it is important to keep in mind that taking a hard money loan has its advantages and disadvantages. This article will outline some of the pros and cons of a hard money loan to help you know what you’re getting involved in when you opt for one.
What Are Hard Money Loans?
Hard money loans are secured, short-term loans. They are sometimes referred to as fix and flip loans and are mostly given to real estate investors. If you want to fix and flip an investment property but you lack the cash, you could consider going for a hard money loan.
Unlike traditional lending institutions, hard money loan lenders don’t have a lot of requirements. However, they will need to see proof of income and your credit history. Keep in mind that they also have higher interest rates as compared to traditional loans.
These loans also have a shorter repayment period, but you can acquire them quicker than you would a loan from the bank. While hard money lenders will review your credit report, that is not their main concern. This is because your property will serve as collateral for the hard money loan.
The loan amount will also depend on the value of your property. A borrower that has a long history of fixing and flipping properties will most likely have better chance of qualifying for a hard money loan. If you have a long history, your borrowing limits may also be higher.
Pros of Hard Money Loans
• Quick approval process
One of the major advantages of hard money loans is their quick approval process and financing. As a matter of fact, you can get your loan approved the same day that you request for it. However, a hard money loan lender may need to verify some information. Keep in mind that different lenders may have different lending terms.
Most lenders will review the following:
Your experience or history in fixing and flipping properties
The value of your property
The equity that you (the borrower) has
How you plan to repay the full loan amount, and
The cash reserves you have, which will serve as holding costs.
The loan processing begins immediately the lender has verified the aforementioned information, and you can receive the full loan amount in a couple of days. Compared to banks, this is quite fast because banks may take up to a month before your loan is approved.
Compared to traditional loans, hard money loans have more flexible terms. They have less stringent terms and policies because hard money loan lenders do not have a standardized lending process. The loan amount you get will depend on the value of your collateral. You can also negotiate the repayment schedule to come up with one that fits you best.
• They approve funding for projects others wouldn’t consider
Another notable advantage of hard money loans is that you can get funding for a project that a bank wouldn’t even look at twice. It doesn’t matter if your property is up for foreclosure, a hard money loan lender will provide you with financing. Moreover, your poor credit history will not matter to these lenders, they are only concerned about your property’s value. Their loan-to-value ratio (LTV ratio) is also considerably low. They can even settle for an LTV ratio of 70 percent.
Cons of hard money loans
• The interest rate is relatively high
Hard money loans have a higher risk compared to traditional loans; as such, the interest rates are relatively higher. Most of these lenders offer interest rates of between 7 and 12 percent. In addition to high-interest rates, you are also required to pay a lenders fee. The fee ranges between 1.5 and 10 percent of the loan amount.
• You have to remit a down payment or equity
Hard money loans may also inconvenience you because you are required to pay the lender a down payment or equity of about 25 to 30 percent. This amount may deter some real estate investors from taking up the loans. The lenders require you to pay this amount to ensure that you have adequate equity on the property.
• Short repayment period
Hard money loans usually have a shorter loan term. Most lenders will give you a loan term of between 1 and 3 years. However, there are exceptional cases that allow up to 5 years. This short-term period is disadvantageous because if you will not have already flipped the property for a profit, things may not work on your favor.