What Is A Hard Money Loan And How Does It Work?
There are people who need money urgently, often in situations where they are caught up in some cases and need to deal with basic necessities of life immediately. They intend to try to get a loan from the bank, but often the case is declined because they don't have a good credit history, and not too much capital- their loan application is usually denied.
But this doesn't necessarily have to be the case. In fact, there is an alternative option in the form of a hard money loan that provides the opportunity for applicants to borrow money despite the lack of good credit history. Read on, as we break down the intricacies of hard money loans.
What is a Hard Money Loan?
A hard money loan is asset-based commercial financing. It means that the lenders will lend money to borrowers based on the value of their real estate. In this type of debt financing, the borrower is not required to show strong credit scores or and proof of revenue. In fact, in most cases, the lending criteria are based solely on the value or "hard" appraisal of the real estate on which the loan is provided.
How Does Hard Money Loan Work?
Hard money loans have provisions that are mostly contingent on the value of the property used as collateral, not on the standard of the credit of the borrower. As conventional lenders, like banks, don't make hard money loans, hard money lenders are mostly independent individuals or businesses who see the benefit in this form of a highly risky venture.
Hard money loans can be pursued by estate flippers who intend to remodel and later sell real estate that is being used as collateral for funding within one year, if not earlier. The increased cost of a hard money loan is compensated by the expectation that the debtor expects to pay off the loan reasonably quickly–several hard money loans are for one to three years–and some of the other benefits they offer.
Requirements for Hard Money Loans
Hard money lenders are mainly concerned about the amount of equity the debtor has accrued in the asset that can be used as collateral. They are less interested in the credit score of the debtor. Points in the borrower's history, such as foreclosure can be ignored if the loanee has the money to pay the loan interest.
The hard money lender has to also put into consideration, the plan of the loanee for the property. The loanee must put together a feasible plan to inform the lender how they intend to pay back the loan. Normally, this would involve improving the value of the property, and selling it, or seeking long-term funding in the future.
Hard Money Loan Interest Rates
Several hard money loans have high rates of interest relative to standard loans like regular mortgages. Usually, the hard money loan rate is approximately 7-15%, which is almost double or threefold the bank loan. This is typically the case because investment in real estate can be high-risk.
What are the Pros of Hard Money Loans?
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Speed
The speed at which hard money loans get approved is the biggest advantage of opting for them. You can expect the funding process to be done in a matter of days instead of weeks (depending on the negotiations), which is not the case with a conventional loan. What this means is, if you need funding fast, there is a very good chance that your best bet is to go for a hard loan. This is possible because, with these transactions, the lender doesn't have to run an extensive credit check on you or wait for appraisals and other requirements to be met.
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Flexibility
A hard money loan allows the borrower to dictate what the remaining loan balance will be, including a longer amortization period or a fixed interest rate. Investors can also use their hard money loan to pay off other debts or to fund a new business venture. More importantly, hard money loans allow borrowers to make decisions based on their needs and coming to an understanding with the lender, instead of being stuck with a strict repayment schedule.
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Bad Credit Score Cannot Rule You Out
There's no doubt that the overwhelming majority of people who want to borrow money do have some kind of credit history. A lousy credit score can even prevent people from getting a loan if their scores are too low. However, there are other alternatives for those who do not qualify for the classic loan product on account of bad credit scores. With hard money loans, borrowers do not need to rely on their good credit standing as their security or collateral -- this often proves to be a "turn-off" factor, like inadequate income or insufficient job history.
Cons of Hard Money Loans
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High Interest
Though you could still opt for a hard loan, you ought to be aware of the disadvantages of taking one out. For instance, the interest rate that is applied on hard loans is considerably higher. And, if you're unable to pay back the loan or default on its terms, you might end up losing assets that are in your possession.
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Short Repayment Schedule
Often, hard money loans have a very short repayment time frame. For example, the borrower may have to pay off the entire loan in only two years (instead of the more typical ten-year time frame that is common with other types of mortgages). This can make it difficult to save up enough money for a down payment if you are not receiving regular paychecks.
Hopefully, this piece has furnished you with enough information and certainty to contemplate applying for a hard money loan to subsidize one of your future property deals. The higher financing costs may appear to be frightening from the start, but the advantages of getting your loan approved almost instantly and have the option to acquire financing when every one of the banks has said "No" will far exceed the additional expense.