Not all borrowers are either able to or have the desire to obtain a traditional mortgage. There are options for borrowers who cannot obtain a traditional loan. One of these potential avenues is called a hard money loan. In general terms, this is a loan that is backed by physical property as collateral. In some instances, these loans may be fast and convenient for borrowers who need access to capital quickly.
Traditional loans are dictated almost solely by a borrower’s credit history and their ability to repay the loan. Customers who have a checkered credit history are considered to be risky, and banks will hesitate to loan money to them. In addition, potential borrowers without a credit history are also considered to be risky by banks and will have difficulty getting loans. At the same time, banks will also look to a borrower’s income as evidence that they can meet their obligations to the bank. Assuming that a borrower can satisfy these two inquiries, they then have to wait for approval and for the loan to be executed. This can take a considerable amount of time, which can break a borrower’s ability to pursue a specific deal for which they would need credit.
Hard money loans present a way around nearly all of these challenges. The borrower will need to have a physical asset that they can use to secure the loan. The asset securing the loan is most commonly real property, but other types may be accepted. Lenders may vary on what types of property would be suitable to secure the loan. The physical asset is used as collateral, such that if the borrower defaults on the loan, title on the property will revert to the lender and the borrower will forfeit the property.
Hard money loans are suitable for certain types of borrowers. Given that their terms differ from traditional mortgages, most of these loans are for shorter durations than mortgages. The average duration of a hard money loan is from six to 24 months. Those who purchase and hold property for the short term are ideal candidates for this type of loan. Hard money loans are an alternative to other higher cost options such as a bridge loan or a short-term loan.
Borrowers can also obtain hard money loans more quickly than they could a traditional loan. In addition, since credit history is not an issue because the loan is secured, there are less paperwork requirements than a traditional loan would have. Ordinarily, paperwork requirements can slow the average loan down by weeks. However, hard money loans can be approved and executed in a matter of days with a minimum of documentation requirements. In fact, speed is one of the major selling points of hard money loans. Hard money lenders will typically give potential borrowers very quick decisions on whether they will extend credit. Most lenders will not conduct income verification since their is collateral. Borrowers can bid for a property knowing that they can have their financing lined up and ready to go with a minimum of red tape.
The fact that a hard money loan is secured also allows lenders to be creative and flexible in terms of structuring the loan. With these loans, payment schedules can be adjustable and flexible because the lender’s risk is covered by the collateral. Many lenders offer an interest-only option which can keep payments lower until the conclusion of the loan. There are hard money loan options for both residential and commercial purposes. The amount of credit that a borrower can qualify for is determined by the value of the collateral as opposed to the borrower’s credit history.