Hard money loans are alternative financial solutions private lenders offer over the short term. The product is a favored tool for investors capable of securing the loan with valuable assets, usually in real estate, and often those contending with average credit.
Many individuals opting for private lending pursue real estate, developing house flipping, or rehab properties to sell. These lenders are ideal for people in the throes of foreclosure as well.
The loans are funded by investor group or private lenders instead of the conventional bank or credit union and use the property or equity to secure the loan as opposed to being tied to the borrower’s financial or credit profile.
While the hard money loan is a quick and relatively easy way to obtain financing, the downside is that it comes with a higher interest rate compared with other financial solutions.
Many borrowers find this a small price to pay to be afforded funding for their endeavors. If it weren’t for private lending, some individuals may have limited opportunities for financing their investments.
The Fundamentals of Hard Money Lending
Hard money loans are essentially asset-based financing. The loan provider, typically a private investor themself or an investment group will base funding approval on the asset value instead of focusing on credit or financial profiles.
The loans are typically much more lenient compared to the stringency of conventional lending except these usually have a higher interest assigned and are for a much shorter term, in some cases less than a year. The solution is ideal for investors who buy properties to rehab and resell quickly.
The strategy gives the hard money lender the advantage of getting repaid rapidly. Click here for tips on hard money lending. The key differences between traditional lending and private lenders include the following:
Timelines
Borrowers apply for and settle on private loans faster than a conventional mortgage with much shorter terms than the traditional solutions, which run as long as 30 years. For some hard money lending, the terms range between six to 18 months. The idea is to only hold onto the loan for as long as you need to.
Interest
Private loan providers attach a higher interest to their financing compared to the conventional mortgage. These loans factor the asset value into the underwriting more so than income or credit.
- Whether a traditional mortgage or the hard money loan alternative, each requires that the borrower have a down payment aside from the collateral to further secure the funding.
- The distinction is that the down payment with private lending is considerably higher, ranging up to 30 percent +, whereas the conventional loan would require as little as 3 percent down.
Hard And Soft Money Lending
Hard and soft money lending also compare but are distinct from each other. Here are
Hard money lending
Hard money loans are secured by valuable assets such as property. With hard money loans, the exchange is as straightforward as it comes. The lender holds the property until the funds they provide are fully returned.
If the borrower fails to pay, the loan provider keeps the property sell and recover the balance. It’s essentially a win-win for either party when managed well. Visit https://andersonadvisors.com/hard-money-loan/ to learn how to get a hard money loan.
Soft money lending
Soft money lending is secured based on the borrower’s credit. The client is obligated to repay the loan amount, with approval heavily dependent on creditworthiness, which will dictate the borrower’s ability to repay the debt to the lender.
If credit below average, it’s assumed the client is a poor risk and would be unable to repay the loan. If a default occurs with this lending the borrower is held responsible until the balance has been recovered.
Who Is Most Suited for a Hard Money Loan
Those likely to benefit the most from a hard money loan include:
- Borrowers who are ineligible for conventional lending
- House fix and flip investors
- Homeowners in the throes of a foreclosure but with substantial equity in the property
House fix and flip investors
Investors who purchase properties to rehab and then resell to gain a profit, also called property flippers, often seek hard money loans. They favor this financial solution because the process is fast and easy.
Expediency is highly advantageous when going against considerable competition to bid on a property. Where you could close rapidly, another investor may need 45 days and sellers are keen to work with the most efficient and fastest.
Borrowers ineligible for conventional lending
Some borrowers may be ineligible for a fixed conventional loan with a 30-year term from a bank or credit union. This can happen for numerous reasons whether their credit was adversely affected by a divorce or they’re unable to document their income which can be a challenge for business owners.
Self-employed individuals who have many write-offs may be able to readily afford a mortgage with little difficulty; however, their taxes don’t reflect this capacity. Hard money loans are usually the only viable financial solution for someone self-employed.
Homeowners facing foreclosure, albeit having considerable home equity
This is a rare situation, but some homeowners have substantial property equity but still face foreclosure risk.
Private loan providers will consider financing for these people if they can be assured that the property will sell for enough that they can pay off the first mortgage and earn profit with the sale if the loan defaults.
Final Thought
Hard money loans, learn more here, are a viable financial solution for borrowers who may find it challenging to obtain a conventional loan. Private lenders offer many benefits over that of traditional loans and soft lending but also have a few downsides to consider before committing to the provider.
You will need a substantial down payment along with your valuable assets to secure the loan. The lender wants to stave off the risk as much as possible. In that same vein, the loan will have a much higher interest rate assigned.
It’s essential to weigh the pros and cons as they pertain to your situation and move forward according to your best interests.