Hard money loans are special types of asset-based loans, where borrowers receive funds guaranteed by real property. Hard money loans are mostly made by investors or private companies.
People refer to hard money loans as the last choice of short-term loans. The key to hard money loans lies in property value, not the creditworthiness of the borrower. Because property values are used as the only protection against default by borrowers. This type of loan is in demand because they have a loan-to-value (LTV) ratio lower than traditional loans.
On the one hand, the LTV ratio of hard money loans is lower but the interest rate is higher than traditional subprime loans. Hard money loans are not from banks but from private borrowers. For this reason, the requirements depend on the borrower, as measured by the high potential risk.
Many people apply for hard money loans because there are turnaround situations and most are for short-term financing. Although interest rates are high, hard money loans are in great demand because they can be used as a way to prevent foreclosures.
Reasons for Using Hard Money Loans
Hard money loans are expensive but many people use them. Why? Hard money loans already have their own market share. Hard money loans provide facilities that are not owned by banks that provide traditional funds. Here are the reasons:
- People are attracted to hard money loans because of the speed at everything. Your financial position is not decisive, because the lender will focus more on the collateral that you are collateral. Hard money loans can also be closed faster than traditional loans. The process is fast because the lender does not verify your income, bank statements, and so on. Lenders also do not take ownership of your property. Moreover, if you have a closeness with the lender, the process will be faster.
- Lenders can also be more flexible, unlike traditional loans that seem very binding. Lenders do not need standardized guarantees, but they will only evaluate each transaction individually. You can also change the payment schedule, according to your ability. To get a hard money loan, you can borrow from individuals – not large companies with strict policies.
- The most important thing that hard money lenders consider is collateral. If you buy an investment property, the borrower will provide a loan according to the value of the property that you have guaranteed. You don’t need to worry even though you have a history of foreclosures or other negative items on your credit report, because lenders consider them not an important issue. Lenders of hard money don’t see your credit – just ask a brief question about your personal finances.
Likewise, the required LTV ratio is relatively low. The maximum LTV ratio is only in the range of 50% -70%. With this low ratio, hard-money borrowers can sell your property quickly and can get their money back in the event of bad credit and foreclosures.
Disadvantages of Hard Money Loans
There is no perfect thing because everything has its disadvantages. Likewise, hard money loans cannot be separated from shortages. Indeed, asset ownership can secure your loan – however, hard money loans are only one option. In fact, hard money loans are expensive, so you have to work according to plan so you can make a profit.
The workings of hard money loans may also be different from the loans that you used in the past. In this case, lenders will generally use more conservative methods to assess your property.
While in terms of costs, hard money loans are known to be expensive. If you can apply for another loan, you are advised not to apply for hard money loans – because the costs are not cheap. Instead, you can apply for an FHA loan that is low-cost and does not require perfect credit.
For hard money loans, the borrower will charge a 2-digit interest rate, besides having to pay the initial fee as a condition for obtaining funds. If your loan is not approved because your property needs serious repairs, you can use the FHA 203k loan – who will pay for the rehabilitation of your home at a lower cost.
Take Different Approach
Hard money lenders generally have a different approach than traditional loans. They lend money with collateral from the borrower. Borrowers don’t think too much about your ability to pay. Why? Because when you can’t pay back – to get money back – the hard money lender will confiscate the guarantee and sell it. In this case, the value of the collateral is more important than your financial position.
Hard money loans are short-term loans, with a term of one to five years. Many borrowers want to repay immediately because hard money interest rates are generally higher than traditional loans.
Finding Hard Money Lenders
To borrow hard money, you must contact the investor. You must also find out the lenders in your area that lends money based on collateral. If you are interested in borrowing hard money, local real estate agents and real estate investors can contact you. It is recommended that you contact the lender, discuss your needs with them. Continue to improve relationships with them so they can quickly fund your project.