What is a Hard Money Lender?
As the name suggests, a hard money lender is a non-traditional lender that gives consumers an alternative choice to access funds when the traditional sources like banks make it hard or difficult for them to get approved for ordinary loans. Simply put, hard money lending is a way to borrow money quickly without using traditional lenders or financial institutions. Hard money loans come from individuals or groups who lend money based on using another property you own as collateral.
The Pitfalls of Traditional Lending
Typically, traditional loans require a lot of proof to demonstrate that you can repay the money with ease. In these kinds of loan applications, lenders check your credit scores and your income to determine if it is worth it for them to risk lending their money to you. If you have a pretty good track record and a solid history of responsibly settling your debts, then the approval rate is higher. If you have a bad credit rating, the process will take longer, and the chances of getting a good interest rate decreases significantly.
That being said, the process to apply for this kind of loan is very tedious because of all the documentary requirements you will have to submit. It takes quite a bit of time to gather this data. On top of that, once the application has been lodged, banks and other financial institutions also need more time to study your documentation for approval. If you need the money fast because you don’t want to lose out on a deal, going this route will often stop you from being able to take advantage of the opportunity altogether.
Going with a Hard Money Loan
If you need money quickly and time is really of the essence, then consider getting a hard money loan. Hard money lenders employ a different set of parameters in evaluating your case. They lend you money based on the collateral you give, which is why hard money loans are usually ideal for real estate transactions like house-flipping deals.
Hard money lenders do not make you jump through hoops to get funding because they are not worried about your ability to repay. If something untoward were to happen, hard money lenders are always assured of getting their money back because they can always seize ownership of your collateral and sell it for much more than the loan amount. In this scenario, the value of the collateral is significantly more important than your financial standing.
Hard money opportunities are usually shorter when it comes to payment terms, meaning they last only from one to five years. Unlike mortgages, which can extend up to thirty years, you would not want to drag on this particular kind of loan longer. Hard money always comes with interest rates that are much higher than the traditional lenders charge. Choosing to stretch out your payments to a hard money lender would mean losing more money.
Why Choose this Expensive Loan?
Hard money loans are expensive and yet people still seek them out. Remember, not every situation is ideal and sometimes you’ll be placed in one where you need access to quick cash no matter the cost. Hard money has its uses for borrowers who cannot access traditional funding. Here are some reasons why this type of money loan is an easy alternative:
Speed of Delivery
Because hard money lenders do not ask you to submit a host of paperwork such as income tax returns, income payslips, or bank statements, there are not as many details to review. The only thing these lenders are concerned about is the quality of the collateral you have, which means the loans they make can be closed at a much faster rate. When you have established a good relationship with a hard money lender, the process will move even faster, allowing you to close more deals.
A hard money agreement offers much more flexibility when compared with traditional loan contracts. Since hard money lenders do not employ the same standardized underwriting process to draft their contracts, they are able to evaluate and consider each loan application individually. Hard money lenders can easily change details like payment schedules. It is common that you will be borrowing from a single individual, and not a huge corporation, so there are no rigid, standard policies to satisfy.
High Approval Rating
Since the most important criteria for this kind of loan is your collateral, the lender will be able to lend you as much as that collateral is worth. For instance, if you’re buying a piece of real estate investment for the purpose of house-flipping with a quick renovation and sale, the lender may let you borrow as much as this property is worth. You can even go so far as to use your personal home as collateral because it is still considered an asset that a lender can sell to get their money back should you default on your loan payments.
Hard Money Makes Sense
Since hard money comes at such a steep price, be sure that you have the funds to repay your loan quickly. The shorter terms you have in place for this kind of loan, the better things will be. House-flippers are perfect examples of hard money patrons. They acquire property long enough to fix it and increase its value: they don’t live there because the goal is to sell it fast for a profit. Once sold, they can repay the loan immediately. If it takes longer than expected to sell the property, they can consider refinancing the hard money loan with a traditional lender to get a better deal.
Hard Money Pitfalls
Even though hard money is easier to borrow, it doesn’t come without risks. Be sure you are willing to make a calculated risk to ensure you don’t damage your financial standing. Remember that hard money is not the only option, but it is certainly the quickest. You have to work really hard to ensure that all your plans materialize, so you can make a profit and pay back the loan quickly.
One drawback is that the lenders may price the value of the property you are selling as low. Since the property is the only protection that lenders have against default, they require very low Loan-to-Value ratios (LTVs). If a standard mortgage company prices the property at around 80 percent or more, these hard money plans will only put in 50 to 70 percent of the property value.
In addition, hard money lenders have more conservative methods because, of course, they want to be able to make a profit off your collateral property should things go awry. That’s why some people call hard money a “loan of last resort.” You take the risk of losing something valuable if you cannot repay the loan easily or pay the steep interest price that comes with it.
The cost of using hard money is expensive so, if you have other means, explore those options. When you borrow hard money, you can end up with double the annual percentage rates (APRs) in interest and you might have to shoulder some origination fees. Remember, this type of loan has shorter terms because it is a quick fix for a temporary need. This is not something that you should plan to keep around for long.
Finding Hard Money Lenders
If you intend to get into the house-flipping scene, you’ll need to network and connect with investors. Ask around to find out who in your area lends money based on collateral. Local real estate agents should be able to introduce you to an investor, or group of investors, who make hard money loans. Talk to these people and establish connections. Developing relationships will help you fund your future projects easily when the time comes.