When a loan needs to be processed quickly or when traditional methods may not approve a loan, hard money loans may be the option to turn to. The hard money loans have a multitude of uses but are typically used in short-term real estate investing.
What Exactly is a Hard Money Loan?
Usually, loans are backed by the credit of the borrower, however, a hard money loan is back by the value of the property. Interest rates are very high, as the traditional avenues for borrowing do not loan hard money. Hard loan lenders are typically private investors that see value in the risky venture. The loan can be used for a variety of situations such as a person having bad credit but equity in their property.
Hard Money in Real Estate
Hard money is typically meant for short term real estate investing. This is common in property flippers that seek to renovate and sell the property within a year. The quick turn-around in the property offsets the high interest rates of the hard money loan. The hard money lender may see value in a property that a traditional loaner does not, and may give a loan for a property that would not usually be approved.
The loan may also be used as an entry point into real estate. A loan on a property that is not worth much would not generally be approved through a bank. However, with a hard money loan, the property could be purchased and then refinanced once the property has a larger value.
Why Choose a Hard Money Loan?
Hard money loans may be the only option if an individual has bad credit but has equity in the form of property. The use of property as collateral on the hard money loan makes the loan more available to a larger crowd, specifically those that do not have the credit to borrow large amounts.
The process of having a hard money loan approved is also much quicker. A traditional method will examine the background of the individual, including the credit history and loan history. With a hard money loan, only the property value is assessed, and the hard money lender will typically make a faster decision as there are less factors to consider. The lender may not even be concerned about the repayment process as there is a chance to profit from reselling the property themselves if the borrower defaults.
The Repayment Process
Hard money is different that traditional loans in the repayment process as well, with the underwriting process is not standardized among hard money lenders, and the absence of the standardized legal process opens the repayment process up to negotiation. This will mean that every lender will offer repayment plans differently, and the aggressiveness of each lender will be vastly different.
Typically, lenders will evaluate each case on its own, and will devise a repayment plan based on the individual, the property, or a variety of other factors. This could be a huge advantage if the situation an individual is in is unique and needs accommodations.
Hard money loans may be a good option for some, especially those looking to invest in real estate. They can be expensive, and are not recommended for longer term investments, but to the right person in the right situations, hard money loans are faster, easier, and more ideal than a traditional method.
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