Hard money loan is a type of loan where a borrower uses the property as collateral. Banks and other traditional lenders usually do not provide this type of service. Instead, they are much more common for companies and private investors.
The main reason to turn to hard money lenders is the quick lending procedure. The investor can give you money in just a few days, and you don’t have to hassle with the same arduous procedure common for the banks. But given that the investor will take extra risks, they also require higher interest.
In this article, we will explain what is a hard money loan, and how you can benefit from it.
What is so specific about hard money loans?
The reason why we refer to these loans as “hard” is that they are always backed by property. In case of a default, a lender will gain ownership of this collateral, allowing them to recuperate the loss.
The thing that separates this type of service from the standard mortgage loan is the procedure. Getting a hard money loan is much easier, and you don’t have to go through all these background checks. But given this carries more risks for a lender, they usually offset them by increasing the interest rate.
Unlike mortgage loans, which take months to finalize, you can get a hard money loan within days. They are especially great for property flippers, who can use them to renovate houses and sell them at a margin. When making the deal, they will use that same property as collateral.
Most of these loans last from 1 to 3 years and might carry some other advantages. Keep in mind that the lenders can adjust the interest rates as they see fit and are not regulated by the financial bodies. When making the deal, the lender doesn’t focus on the borrower’s credit score but instead on the property‘s value.
How do people use hard loans?
Although you can use these loans for just about anything, there are a few situations where they are an optimal solution:
· Flipping properties
Hard loans shine when flipping properties.
Even if you have limited financial resources at your disposal, you can start flipping houses. Most entrepreneurs focus on rundown properties as they can get them at a low price. Then, they would invest in renovations and sell the house at a very high margin.
Due to the fact they’re buying rundown properties, the cost of renovations can be massive. At this point, the entrepreneurs might struggle due to a lack of financing. As a way to circumvent the issue, they will utilize that same property as collateral and get a hard loan from an investor.
The whole enterprise depends on speed, as the entrepreneur would like to sell this house as soon as possible. So, a short-term hard loan is ideal for them as they can pay it off upon selling the property.
· Buying a commercial property
Sometimes, people can’t get financing for specific commercial properties. There might be a regulatory issue or some other problem that would dissuade traditional lenders from borrowing them money. In such situations, you should get a hard loan as these lenders usually have much more flexibility.
· Buying an investment property
The similar goes for other types of investment properties. Besides potential issues with the property, an investor might be ineligible for a loan. For example, they might have a bad credit record or insufficient salary for covering the project.
What are the pros and cons of hard money loans?
Advantages of hard money loans
As mentioned, the main benefit of such a loan is the speed. You can ink a deal after just a few days which, among others, will have a positive impact on your profitability. Sitting on a property for a few months without any action will lead to additional costs.
You also won’t have to hassle as much. The whole process is straightforward, and it can be even quicker if you have a business history with the lender.
Lastly, the lenders are rarely concerned about your credit state and the ability to pay off the loan. In some cases, they will even make a profit if you default as they can now utilize the property for themselves.
Disadvantages of hard money loans
The main problem with hard loans is their interest rates. For example, they vary from 7.5% to 15%
Despite the fact it is rather easy to get a hard money loan, there are a few situations when lenders will opt out. For example, if the property is occupied, they might be concerned about potential compliance issues and regulatory oversight.