A San Diego hard money loan is a form of borrowing that bypasses the conventional arrangements of a loan. Conventional loans are mainly based on the borrower’s credit score in addition to other factors. hard money loans are based on the value of the pledged asset. Since the property serves as collateral, most of the times the loans have a low loan-to-value ratio compared to conventional loans.
San Diego hard money loans are mostly useful in situations where the borrower has limited choices. Because banks and traditional financial institutions follow a certain process that includes validation and checking of credit scores, most borrowers in dire situations cannot be granted loans in time.
Since San Diego hard money lenders use a borrower’s property as collateral, these loans are mostly suitable for borrowers who cannot access loans elsewhere. Due to the risky nature of the loan facilities, they are only offered by a handful of investors and individuals.
The terms of these loans are not as sweet as the terms of a conventional loan. This is attributable to the risky nature of the loans. Borrowers, therefore, are subjected to interest rates that are higher than the market interest rates. Hard loans are also common in areas where banks and other institutions cannot come through in time.
To approve a loan, financial institutions have to confirm the ability of the borrower to repay back the loan. They look at the borrower’s income, his or her credit score, and obligations, among many other factors. If you have a history repaying loans in a timely manner, your chances of approval will be high.
Even with good scores and a great flow of income, borrowers might still be tagged for small faults that may appear in their reviews. The application processes are also slow and tedious because they involve the verification of details and crosschecking among different agencies. Even with all the time spent, borrowers are not guaranteed of an approval.
San Diego hard money lenders, on the other hand, view the loans from a different angle. They are more concerned about the value of the collateral and are less interested on the borrower’s ability to repay the loan.
If the borrower is not able to repay a hard money loan, the lender can take possession of the property and sell it to get their money back. Hard money loans are also short term because of the high interest and the levels of risks involved.
The following are some of the advantages San Diego hard money borrowers enjoy
• Flexibility: Conventional loans are not flexible because they are guided by strict policies and procedures set by the law and the financial institutions involved. Lenders of hard loans, on the contrary, are quite flexible because their loans depend on the terms the involved parties agree on. Depending on the situation, the parties can discus to change the terms or certain aspects such as repayment periods and structure.
• Speed: Because the lenders are less interested on the financial history of the borrower, all the time spent by traditional financial institutions verifying ability of the borrower to repay is saved. The lender is only interested in the value of the collateral, implying that the process moves fast. This is advantageous to the borrower because he/she can access the finances within a short time and get on with his/her project. This could be significant if the borrower needs to close a hot deal. This is mostly applicable in fast deals such as hot markets and trend based businesses.
• Approval rate: The most important piece of the puzzle in a hard money deal is the collateral. The lender is interested in verifying the value of the asset and is less concerned about the other things. If the collateral is genuine, a borrower is almost guaranteed of an approval.
Having looked at the advantages of such loans, it is also important to look at the drawbacks posed by these products. They include:
• Cost: This is the biggest drawback associated with hard money. The cost of the loan is usually higher than that incurred when one is applying for a conventional loan from a financial institution. The high cost comes in form of high interest rates mainly attributable to the risky nature of the loan. The cost might also blow the roof if the borrower ends up losing his or her property to the lender. This is attributable to the fact that most lenders are mean when it comes to valuation of property, since they don’t depend on the conventional methods of valuing a property. They mostly value property based on the price that they can comfortably sell it for.
• It is a short term loan: Because there are few assurances, lenders prefer to keep the agreement short so that they can minimize their exposure to risks. Borrowers seeking long term loans are usually turned down.