For some people, a traditional loan is not an option. Those that have had their credit scores adversely affected by late payments, penalties, or a bankruptcy can sometimes make securing a traditional loan next to impossible. If this is your case, you might consider taking out a hard money loan instead.
Hard money loans differ from traditional loans in one key aspect: collateral. While a traditional loan looks at your ability to repay the loan through things like your credits score and debt-to-income ratio, a hard money lender only pays attention to what you offer as collateral, like a pawn shop. If you are requesting a $5,000 loan, you’ll have to find some items of value that will be equal to or greater than $5,000; if you default on your loan, the lender will sell those items to recoup their loss. The loans generally last between 1-5 years due to their high-interest rates; anything longer than that has the potential to do more harm than good.
While finding a hard money lender can sometimes be a challenge, they may be perfect for someone who is in a bind.
If You Need Cash Fast
One of the downsides of traditional loans is their inability to close loans quicker. Because there are so many financial documents to siphon through, such as financial statements, credit reports, income verification, and so on, it can sometimes weeks or even months to secure a loan – if you are approved in the first place.
Hard money lenders are not concerned with any of those things. The only thing a hard money lender cares about is the value of your collateral, and while they would prefer not to take possession of your property and possibly pay to have it sold off, they are still protected in the event of a default. A traditional lender will only seize your property in the event of a default after they’ve evaluated your property assets; with hard money lenders, all that legwork is finished up front.
Speed is an advantage for many people who are looking to take advantage of a hot market. Real estate investors and day traders usually need money quick in order to secure a great deal, and so they may put up collateral with a hard money lender to do so. If nothing else, they don’t have time to wait for a traditional loan to be approved.
If You Want a Simple Loan
Traditional loans, especially nationwide chains that may simply have a branch in your town, are usually underwritten by different parties, making the loan-approval process time-consuming and rigid. Depending on where the hang-up is in the process, you may go through several different people before you finally reach the right person to handle your issue.
Hard money lenders are surprisingly simple. Since, in theory, anyone with cash that is willing to accept collateral can be a hard money lender, the process is usually streamlined down to a valuation of the assets and delivering the money. Not only can these be completed quickly, but if there are any issues, you can talk to the hard money lender directly, instead of going through a corporate hierarchy to find the right person. And if you build a relationship with a certain lender over time, the approval process goes quicker.
If You Have a Hard Time Getting Approved
If your credit score and financial reports are less-than-stellar, it can be difficult to secure a traditional loan. The increased risk to a bank would force them to add on an interest rate that is astronomical in order to alleviate some of the damage in the event that you default on your loan.
With hard money lenders, the risk is minimized by the inclusion of your collateral, which allows for an easier approval process by the lender. Using a Loan-To-Value Ratio (LTV), where the amount requested in the loan is measured against the value of the property that you are buying, hard money lenders are typically more lenient than traditional loans. They offer a lower LTV rate which means you need to make up the difference with the assets you put up.
Since collateral is offered at the outset, hard money lenders know that they can sell off your assets quickly in order to recoup some of the money. While they may ask about your personal finance history, some may not even look at your credit report, which is important if you’ve got a few blemishes on your record.
Hard money lenders are not for everyone, but for the right borrower, they can make all the difference in the world. If you need money quick and are planning on paying it back even quicker, or just have a hard time getting financing because of a checkered financial past, hard money loans can be perfect for you.