As the saying goes, “You have to have money to make money.” There are variety of ways that entrepreneurs collect the cash needed to run and grow their businesses. This is especially true in the real estate development world, where the investments needed to acquire real estate is rather large. Borrowers may collect funding from banks, mortgage companies, or private parties. Among this list, private party hard money lenders have substantially grown in popularity recently.
While hard money loan rates are generally higher than traditional loans, there are benefits to using hard money loans that make them attractive to business owners who are looking to raise funding for a property investment, or to acquire a similar large asset. In example, borrowers who do not qualify for banking mortgage loans because of their poor credit score can still get funding with a private hard money lenders. Other times, the terms of the loan are more beneficial to their investment and outweigh the higher hard money loan rates. If you are new to the concept of hard money lending, we have put together an overview of hard money loans, to help you determine if it is a good option for your.
What are hard money loans?
Traditional mortgage lenders utilize factors like the borrower’s credit worthiness to determine their qualification for a loan, whereas hard money lender approves the loan based on the value of the asset being purchased. While this results in a greater risk for the hard money lender, if the borrower is unable to fulfill the terms of their loan, the asset can be recovered to offset the balance of the debt.
Since the lack of credit worthiness put the hard money lender at a higher risk, the increased hard money loan rates make it worthwhile. Generally, the greater the risk of the hard money loan, the higher the hard money loan rates will be. Sometimes, you’re able to negotiate your hard money loan rates based on the amount of equity that you can put down and the business relationship that you have with the lender.
Pros of Hard Money Loans
A few advantages to using a hard money loan to fund your needs include:
- Faster turnaround times. While the traditional mortgage lending process can take weeks or months, a private lender can approve a hard money loan within 24 hours. When you find an investment opportunity that just isn’t going to wait, using a hard money loan might be beneficial.
- Diverse collateral options. While a mortgage lender might require a certain percentage in cash as a down payment, a hard money loan lender will accept collateral in an asset to secure the loan. Sometimes, hard money lender will even accept future earnings of the asset as collateral. For example, if you are planning to renovate the property to rent it out, the rent that you generate from the building you are purchasing can be used a collateral to secure a hard money loan.
- Flexibility in terms. Although hard money loan rates tend to be higher, you may find flexible terms that meet your needs better with a hard money loan. Terms such as the length of the loan, and the payment options tend to be more flexible with hard money loans than with standard mortgage loans.
- Lower credit restrictions. When you have poor credit and do not qualify for traditional loan, a hard money lender may still be willing to work with you, depending on the value of the property you are purchasing. We should note that a hard money lender may still require some level of credit worthiness; if you are going through bankruptcy, you may have trouble securing hard money funding.
Cons of Hard Money Lending
- Greater cost. Because of the more flexible terms and credit worthiness of the hard money loan, private lenders recover their risk through higher fees and rates.
- Shorter repayment duration. Typically, the repayment terms of a hard money loan is far shorter than that of a traditional mortgage. Hard money loans will typically only last up to five years, whereas a traditional mortgage can be spread over 30 years.
Do you have any other questions about hard money loans? Please share them in the comment section below; we’d love to help you out.