Loans come in many forms with their own stipulations and strings attached to it. However, there are a special type of loan that is considered to be a “last resort” by many. These are referred to as hard money loans.
What are Hard Money Loans?
Hard money loans are a form of loan that is commonly used in transactions in real estate. The terms of a hard money loan are what makes a hard money loan different than your standard loan.
Here, the value of the property is used as collateral as opposed to the usual credit rating of the borrower in question. Banks do not make hard money loans, which means that this money is distributed by private companies or individuals. This is why a great deal of risk is associated with hard money loans.
How Does It Work?
Hard money loans are commonly used by people who want to renovate property and then resell the real estate, typically within a year. Hard money loans are typically be more expensive, but this cost is often offset by the fact that borrowers tend to pay it back relatively quickly. On average, these loans last no more than three years.
Advantages of Hard Money Loans
Hard money loans come with a few convenient advantages for the borrower. Arguably the biggest advantage at the borrower’s disposal is that the approval process is very swift. The private investors who loan people money are bale to come to decisions very faster because credit checks are not a part of the approval criteria.
Usually, hard money loan lenders are not as concerned about getting their money back as opposed to other financial institutions because of the high potential in what they may get by reselling the property should the borrower default on repayment.
In addition, hard money lenders evaluate every loan dispensed by case. This means that borrowers will be able to opt for more opportunities to pay the loan back during the time frame afforded to them. Adjustments are often negotiated without complaint from either side.
Disadvantages of Hard Money Loans
The biggest red flag towards hard money loans are the very high interest rates. Unfortunately, these interest rates can prove to be very high, especially when compared to other loans such as subprime loans. Also, since the property is the only means of protection, loans have a much lower loan-to-value ratio.
You must also consider that lenders of hard money may not provide adequate financing for a residence that is already occupied due to specific regulatory edicts.
Hard money loans have been used as a way to get quick and convenient financing. These loans could come in handy for those who do not have the best credit score. With the swiftness of which the loan can be dispensed, it could be a convenient method to avert an emergency.
However, you should consider all of the benefits and risks that come with hard money loans. They come from private parties, and you must be responsible in effectively evaluating the risk so you do not put yourself in a bigger predicament