A loan that is backed by the value of a property and not a borrower’s credit score is known as a hard money loan. It is the property provided by the borrower that will assure the lender they will not default on the loan. These types of loans, when compared to traditional loans, provide the borrower with quick and easy access to investment funds.

Short-Term Financing Option
Hard money loans are a popular method for obtaining short-term financing. This will give a borrower flexibility and quick access to funds when capital is essential for a timely investment. These loans require borrowers to meet fewer qualifications than a conventional loan and feature interest-only payments.

Quick Cash
When needing funding for short-term investments, hard money loans can be a valuable tool. It can enable a borrower to have quick access to funds needed for the purchase as well as renovation of property. A conventional loan could take too much time and involve too much paperwork. A hard money loan makes it possible for a borrower to quickly get a property, renovate it, sell it or rent it to tenants.

Flexibility
hard money agreement provides a higher degree of flexibility when compared to a conventional loan agreement. With this type of loan, a lender’s standard process for underwriting a loan is not utilized. In this situation, each deal is given an individual evaluation of its merits. Certain aspects of this loan can be negotiated such as repayment schedules and more. With a hard money loan, the most important thing a borrower has is collateral. Lenders are often motivated to lend as much as a borrower’s collateral is worth.

Portfolio Investors
These are long-term investors who simultaneously own many different properties. Should they come upon a property they would like to finance, it may be difficult for them to obtain a loan from a conventional mortgage lender. When a conventional lender sees a borrower with up to ten mortgages, they are hesitant to grant them a loan. In this case, an investor may not have any other choice but to get a hard money loan using their current properties for collateral.
Drawbacks
A hard money loan can help a borrower, but it can also be very negative if not utilized properly. When a hard money loan is obtained, it is important the borrower have a plan in place to repay the loan quickly and obtain profits. Should this not happen, the expense associated with a hard money loan could be financially harmful. It’s also possible for a lender to value a property much differently than the borrower. In many cases, a hard money loan may come with double-digit interest rates.

Pre-Qualification
During this time, a borrower will learn about their loan options and be asked to provide various documents. This could include up to three months of bank statements, proof of employment, two recent pay stubs, proof of debt to income ratio being less than 50 percent, a personal credit score of over 640 and more. Once this is completed, an investor will learn about the potential size of their loan, terms, fees, costs and then set a maximum budget. When this is done, an investor can receive the funds and move forward with their investment.

Funding
Prior to this happening, a hard money lender may require a purchase contract concerning the investment. This should show the details of the agreement between the borrower and the seller of the investment. Appraisals of investment can be provided but are often conducted by the hard money lender. A borrower may be asked to provide list of past projects showing how they were handled and their end result.

Hard money loans are an important tool for investors who need to obtain funds quickly and easily. They are popular with those who fix and quickly flip various properties. They also are important to property investors who want to renovate their investment property for tenants. The ability to provide a quick approval process as well as interest-only payments make hard money loans attractive to many investors.