When conventional means of lending fail, it is time to look for alternative ways for obtaining your cash, and the hard money loan is one of those alternatives. Its main characteristics are fast approval, lenient standards, flexibility and broader opportunity.
What Is Hard Money Lending
Issued by private individuals or companies, hard money delivers where conventional loans fail. Hard money loans are a form of asset-based loaning, meaning the lenders base the loan on the asset you own, rather than the owner.
This helps individuals tremendously because the credit score is taken out of the equation, which is the most common reason for not obtaining the conventional type loan.
People usually turn to this loaning because they either didn’t obtain the loan via conventional methods or need the money fast. The most common types of loans are: bridge loans, fix and flip loans, owner-occupied loans, and construction loans.
Benefits of Hard Money Loans
One of the most significant benefits of hard money lending is its short-term financing. While conventional methods can take up to 8 weeks, hard money lending can take 5-10 days. Why? Well, travels directly from lender to you, which means less painful bureaucracy.
Furthermore, hard money lenders tend to ignore bad credit, foreclosures, bankrupt, etc. These things usually prevent you from getting a traditional mortgage loan. The lender will value your property and finance a credit based on the value of that property, which makes perfect sense.
Alas, it’s a convenience thing. Some people just don’t have the time, money or the energy to go through the painful process of obtaining the loan through banks. Some investors are entirely comfortable with paying the higher interest rates so that they don’t miss out on a significant opportunity.
Downsides of Hard Money Loans
While pros tend to outweigh the cons, hard money loan has its price:
- Higher interest rates are the result of short-term financing. While the conventional methods tend to offer 3.5% interest rates, hard money lending usually propose 7% or higher interest rate.
- Fewer regulations is a double-edged sword. It is vital that you do your research if you are looking for a hard money loan. An example of the credible lender is the Los Angeles Delancy Street, which is considered to be the go-to hard money lender in the state of California.
- You will have to pay your loan faster than you would via conventional methods (usually in a manner of 1-2 years).
Should You Take The Loan?
There are several factors you need to consider before taking this type of loan. First and foremost, you need to make sure that you are dealing with the legitimate lender. Also, hard money loan should be your last resort, and if you can get your loan from the bank than you should probably consider taking it. However,
Furthermore, you can’t use the credit to finance your private business or something similar (the loan isn’t for consumers, only investors). However, if you want to get a loan as a consumer, the lenders will thoroughly check your ability to repay the loan, which isn’t the case if you are an investor (where they test the value of the property and not the ability to repay the loan).
It Is All About Timing
Let’s say you need to act fast: you have two days to make an offer on the property, but you don’t have enough money to offer one. Now you know that purchasing this property would make you a lot of money on a long-term period. In this case, the hard loan is the best and the only solution to get your money fast and safe.
Again, hard money lending is very situational. You have to know the market very well because the hard money loan can easily backfire. But if you are an expert or have an expert advisor, then the hard loan is the optimal solution. Just make sure you have a solid refinancing plan.
Overall, hard money lending is a good alternative if conventional means of loaning fail. Just make sure that the lender is legitimate, that you have a plan in mind and that you understand the risks of not paying back the loan on time.