What is a Hard Money Loan? –
According to Investopedia, hard money loans are usually a real estate loans that have their terms based almost entirely upon the property’s value as collateral. Hard money loans are not issued on the basis of borrower creditworthiness. Hard money lenders are most always private investors.
Due to the risky nature of these types of loans, the interest rates are high and the repayment periods are short.
These loans have a legitimate spot in real estate because of some of their important benefits.
Faster Access to Capital –
According to Realtor.com, the beauty of a hard money loan for a real estate investor is when they see an opportunity that must be acquired quickly. The hard money loan approval process is quick and easy, so the investor can snap up their acquisition before someone else grabs it. In fact, traditional mortgage loans take around 45 days to fund the loan, but some hard money loans are funded within 24 hours.
Easy Approval –
So long as the borrower has the requisite down payment and is trying to purchase a desirable property that has equity and investment potential, the lender does not look into their credit history.
Flexibility in Repayment Options –
Investopedia reported that, since hard money lenders aren’t straight-jacketed in a traditional underwriting procedure, the borrowers have the capability of negotiating the repayment schedule more for their benefit.
Short Term –
According to Investopedia, even though the interest rates are high, the terms of these loans are usually short, often only one to three years. This helps home flippers to buy, rehab and sell homes quickly. They don’t want to be bothered with a 15- to 30-year loan for a home that they will only own for a year or less.
The same is true of builders who might acquire a residential lot, build on it and sell the home and property. They don’t need to go through the hassle and red tape of a mortgage loan.
In the case of both the builder and the flipper, if they have played their cards right, the higher costs of the loan will be offset by the high profit potential of their investment.
Under-Served Borrowers Can Obtain These Loans –
The San Francisco Chronicle reports that hard money loans often go to higher-risk situations, such as borrowers who cannot verify their income and financial information or who do not have good credit.
Hard Money Loans Help in Negotiations –
Those with hard money loans can close escrow so quickly that the investors may be able to negotiate lower prices from sellers.
Hard Money Lenders Can Be a Second Set of Eyeballs –
Hard money lenders are real estate experts and will only purchase property that they feel will easily sell and recover their losses in the event of your default. If they are declining your loan application, it is important to find out their rationale. Their advice may save you from a bad investment.
At first, with their high-interest rates, hard money loans may not seem useful. Actually, they are an important source of funding for anyone who does not intend upon holding the loan and the home for long, like flippers and builders, and for those who may not have the metrics that qualify them for traditional mortgage loans
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