Oftentimes, you need to present lenders proof that you can repay them the amount that you’ve loaned from them. They usually look into your credit scores or your net income. You’ll most likely get approved for a loan if you have a good history of borrowing responsibly and solid proof that you can repay loans, which is determined by your debt-to-income ratio.
What Is a Hard Money Loan?
Hard money lenders can be individuals or investors who will lend you money depending on the real estate property you’ll be using as collateral. That’s how they’ll secure the loan. They won’t focus too much on your ability to repay or your financial position. Rather, they will look into the value of the asset you have. If you’re unable to repay the hard money lender, your real estate property will go to them. They will then sell this to get their money back. In short, a hard money loan is a loan based on the borrower’s asset or real property.
The Advantages
Flexible
Negotiating with hard money lenders is easier compared to traditional lenders. Traditional bank loans and lenders often have a strict list of policies and terms that you must adhere to throughout.
Hard money lenders have their criteria and processes and don’t follow any standard underwriting process. They look at the borrower’s deals and situations and adjust the terms such as the repayment schedules based on the borrower’s unique situation.
Quick Application and Approval
Since traditional bank loans or lenders are concerned with your financial position, they have to go through your credit checks, review your bank statements, analyze your debt-to-income ratio, look at your lending history, verify your income, and the like. These are long processes that can take days or weeks. And one questionable detail could easily disqualify you in an instant.
Hard money lenders won’t make you go through a tedious loan application process. They usually have a short and simple list of criteria when approving loans. Most of the time, it only takes one day to get your loan approved with them.
Hard money lenders will determine whether the investment seems like a good deal or not, look at the value of the real estate property, determine your experience in the business, look at your equity or down payment, and assess if you’re capable of raising enough money for the monthly payments. These are just a few of the criteria they consider.
Convenient for Many
Traditional bank loans and lenders often have a long list of requirements that you must submit to get approved. They have a strict set of standards for a borrower to be qualified. When one detail seems questionable for them, your application could be stopped or dropped in an instant.
Questionable history may include records of recent foreclosures, bankruptcies, bad credit history, short sales, and loan modifications. And sometimes, even if you have a good credit history and no bad records, traditional bank loans and lenders won’t grant you a loan if you already have four mortgages.
Hard money lenders will mainly look at the value of the real estate property you’re assigning as collateral for the loan. Other things that hard money lenders will look at are your equity in the property, a good and feasible exit strategy, and the amount of cash you have at hand for the monthly payments. Some hard money lenders will also take a look at your business experience and how much you know.
Great for Fix-and-Flip Properties
Hard money loans are often used by fix-and-flip property investors. Vacant properties or properties with outdated structures have lower prices due to their condition. What fix-and-flip investors do is to hold these distressed properties just long enough until their value increases. They approach hard money lenders for the property, and these hard money lenders often seal the deal because they see a potential profit. After about a year or so, the fix-and-flip investors sell the property to repay the loan.
The Drawbacks
Hard money loans seem appealing, but they’re not perfect and come with a set of drawbacks.
Higher Interest Rates
Hard money loans and agreements are riskier for the lender. That’s why they require full documentation of your income and credit history. That is also why the interest rates are higher. Interest rates for hard money loans fall at about 8 to 11 percent a year for your first time. Then it can go up to 10 to 12 percent annually on your second time.
Higher Down Payment
Traditional bank loans and lenders often require an average of 20 percent down payment only. The down payment hard money lenders ask for can range from 25 to 30 percent on average.
Short-Term Loans Only
Hard money loans are short-term only. Most of the hard money lenders will only give you one to three years to fully pay your load. Since it’s a riskier investment and interest rates are harder to estimate, hard money lenders avoid allowing long-term loans.
Looking for Hard-Money Lenders Can Be Challenging
If you’ve decided to apply for a hard-money loan, you’d have to look for a reputable hard money lender. It’s not always easy to look for the right hard money lender that you can easily reach out to. You have to connect with investors and do intensive research. There are a lot of credible hard-money lenders and investors. You just have to find the right one for the business you’re about to undertake.
An Alternative to Hard Money Loans
Many borrowers turn to hard money loans because they’re tired of getting rejected by banks despite having good, clean records. However, higher interest rates in hard money loans put off many borrowers, and this has fueled the growth of real estate crowdfunding.
Real estate crowdfunding allows borrowers and sponsors to raise capital for real estate investments and projects. Whether you’re an investor or borrower, you’ll need to do your due diligence to find the right platform or sponsor to either commit your money to or borrow money from.
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