The word hard money loan may sound novel to many persons. But not to worry, as I will demystify everything you need to know about it. First, a hard money loan is a way to borrow money without using traditional mortgage lenders. This kind of Loan comes from individuals or investors who loan money based on the property you are using as collateral.
Overview Of Hard Money Loan
Getting a hard money loan is sought after for when the need is urgent and loan needs to happen quickly too. Let’s quickly take an overview of what hard money loan is.
What Is Hard Money?
Financial institutions that give loan oftentimes require proof from you that you can repay the loan. They will have to access your account detail, scrutinize the last time you borrowed money if you have ever, and if the examination proves your ability to pay back, you are most likely going to get your loan application approved. This process is tedious and can take a lot of time, which may invariably defeat the aim of the loan if it’s an emergency.
But, hard money lenders adopt a different approach to giving you a loan. They are concerned with the collateral securing the loan, and less concerned about your ability to repay. So, if circumstance strike and you are not able to repay the loan, the hard money lender, has an in-build system to sell the collateral securing the loan. Thus, to a hard money lender, the value your collateral is more important than your ability to repay.
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Further, hard money loans are generally short-term loans. It could last up to five years. However, you would not withhold the money back without repaying it for that long, because the interest rate attached to hard money loans are higher than the ones attached to a traditional loan.
Why Use Hard Money?
Why should you apply for a hard money loan? Remember, the interest rate in hard money loan is much higher than the traditional loan. Well, as said earlier, hard money has its place for certain borrowers urgently in need of loan and can’t get their hand on the traditional loan when needed.
1. Speed: fast
Hard money lenders are mostly focused on collateral security than your ability to repay back. Thus, the loan can be approved more easily than traditional loans. A lender doesn’t need to spend time going through your loan application to verify your income, bank statement, and others. Rather, with strong collateral security, you are.
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Another friendly thing about hard money is that the agreements can be more flexible when compared with traditional loan agreements. The fact is, hard money lenders, don't use the standardized underwriting process used by financial corporations like a bank. Rather, they evaluate each deal separately. There is no set standard for repayment of the loan, say, $5,000 to be paid back in 8 months time. The payment back schedule is fixed depending on the person borrowing the money.
Most importantly, the lender focuses on the worth of your collateral. Consequently, if you are buying a property, the hard money lender will borrow you as much as the worth of the property. In a nutshell, the focus of the lender is on the worth of collateral security and is more likely not to look at your credit card. Albeit, some lender’s, does pay attention to your credit card.
And most lenders keep loan-to-value ratios ( LTV ratios) quite low. Their maximum loan-to-value ratio might be around 50% to 70%. So you will need assets to qualify for hard money.
When does Hard Money Make Sense?
This kind of loan makes the most sense for short term loans. Fix-and-flip investors are a good example of hard money users.
Hard Money Drawbacks
Hard money loan is not perfect. While it appears uncomplicated - your asset secures the loan so everybody’s safe - hard money is only one option. This kind of loan is quite expensive than a traditional loan, consequently, things have to work as planned for profits to materialize.
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To secure hard money, you need to stay connected with investors. Find out within your location who lends money based on collateral security. A good source to get connected is to look for local real estate agents and real estate investor groups. When you connect with them, discuss your needs, and develop a cordial relationship so you can access fund easily when the time comes.