If you’re looking for a financing option to navigate through hardships or to fund your next project, you may feel overwhelmed with the abundance of loan options. Finding one that perfectly fits your needs may be challenging, with so many aspects to consider and so many choices to make. Everyone is talking about hard money loans, how quick and easy they are to get, and you may be confused and wondering what’s the catch.
Hard money loans benefit people who need funds quickly and those who don’t qualify for traditional loans. But what are hard money loans, which gives them, what do they ask for in return, and how secure are they?
Let’s start with the foundations to help you decide whether a private loan is right for you.
Hard Money Loan Basics
Hard money loans come from private lenders and are usually backed by a “hard” asset like real estate. They have shorter terms and higher rates than traditional loans and mortgages.
Borrowers often turn to hard money lenders after the bank has denied them for a loan or mortgage. However, they also apply for private loans because they want to avoid the extensive process of getting approval from traditional lenders.
Unlike traditional loans, hard money loans come with a fast approval process. It makes them ideal if you need to invest in a project very quickly and can’t afford to wait for two months for approval.
While it takes from a month to two months for banks to approve a loan, private lenders sometimes fund the entire sum within two weeks. Sometimes, you can close within several days.
Hard money loans are secured, just like traditional loans are. The loan is guaranteed by the property you purchase with the funds. If you don’t repay the loan on time, the lender will sell the property to cover their losses.
Hard Money Lenders
Hard money lenders are companies and private investors that specialize in a specific type of lending. There are no hard money lenders at traditional institutions – they are always private organizations or individuals.
Because they’re private entities, hard money lenders don’t have to follow the same regulations as traditional lenders. For the most part, they are free to create their own rules and define individual debt-to-income ratios and credit scores. For example, RBI Mortgages offer personalized solutions for professionals and private individuals. They are far more flexible than conventional lenders, which works well for investors involved in many projects and need good loan deals.
Often, when an investor works with a private lender for a long time and establishes trust, the lender will offer lower rates, shorter repayment periods, lower down payments, or whatever works best for a particular client.
The borrower’s creditworthiness isn’t an essential element for private lenders. Instead, they focus on the value of the property the borrower intends to buy using the loan.
Traditional Loan Vs. Hard Money Loan
Unlike traditional lenders who focus on your income and credit score, private lenders are more interested in the property’s value. Although they may check your credit score, they won’t base their final decision on it, and the process will be far less rigorous than with a bank.
Since they don’t ask for so much documentation to prove your creditworthiness, private lenders can approve a loan much quicker.
However, since the lender takes on a greater risk than a bank, private money loans are usually more expensive than traditional ones. The interest rates are higher, and the lender sometimes requires down payments that are larger than usual. While this isn’t always the case, you should always ask about every detail before applying for a private loan.
Hard money loans have shorter repayment periods than traditional loans, too. Unlike conventional mortgages that usually come with 20-30 year terms, private loans are repaid only a few years.
What Are Hard Money Loans Used For, Usually?
Here are some of the most common usages of hard money loans nowadays:
- House flipping – real estate investors who purchase distressed properties, make significant repairs, and then sell them in less than a year find private loans incredibly helpful. They allow them to act fast and grab a suitable property when they spot it.
- Investment properties – investors and individuals who want to invest in rental properties but can’t get traditional financing often turn to hard money lenders.
- Commercial properties – business owners often ask for hard money loans to purchase commercial real estate because they need more funds than they could get from a traditional lender.
In the hands of a real estate investor or a person who wants financing through less conservative institutions, hard money loans are helpful tools. If you’re looking for alternative funding, research private lenders in your area and get to know all the details before deciding which lender to choose.