To get loans, you can opt for traditional lenders like banks and credit unions or go for alternate channels like hard money loans that are borrowed against assets. Certain trades like the real estate ones require quick capital in large amounts. Hard money loans are perfect for deals where a property is to be purchased, renovated, or refinanced. Some investors even use this loan temporarily until they can obtain conventional financing. Once this happens, the property can be sold, and the accumulated debt can be paid off.
The true difference between hard money and bank lenders
Asset-based or hard money lenders are different from bank lenders. Depending on the immediacy of your needs and the purpose of borrowing, you can choose the type of loan that is ideal for you. In many cases, hard money lending is considered to be healthier than borrowing from banks. Firstly, they usually release the funds more quickly as compared to bank lenders. Another advantage is that you have to satisfy fewer requirements to be eligible for the loan. Hard money lenders require strong collateral against the loan and they pay less attention to credit score, cash flows, etc.
Hard money lenders are more open to foreclosure to satisfy the amount they have given as a loan. Banks, on the other hand, would prefer that you use your income to pay back the underlying loan.
Pros of Hard Money loans
There are many reasons and situations where hard money lending is the right way to go. Why is that so? To understand this, let’s look into its advantages:
Speediness of borrowing
Nashville Hard Money Loans are a good option to consider when you aren’t in a financial position to get bank loans. A hard money lender would be more focused on what you have to offer as collateral. Thus, if you are looking for speedy borrowing, then remember you can probably get a hard money loan quicker than a traditional one.
Flexibility of agreements
Besides quick closing rates, hard money agreements are also known for their flexibility. For instance, your lender would evaluate your case on an individual basis. This approach is different from the one which is adopted by banks that take aid from a standardized underwriting process. Thus, it gives you some room to customize changes to options such as the repayment schedule.
Ease of approval
Another advantage associated with hard money lending is the ease with which it gets approved. The reason behind this benefit is that you can only borrow an amount equal to the worth of the asset. Thus, the lender is usually concerned only with the property’s value – the one you are borrowing against. They are unlikely to refuse you a loan even if you have got a foreclosure in your credit report. Many hard money lenders won’t even look at your credit score.
What they do is assess the loan-to-value (LTV) ratio against the property. Higher LTVs depict higher risk; therefore they cost more to the borrowers. In any case, you should have assets that qualify for that hard money that you need to borrow. The guarantee that the lender needs pertains to the property only. They have to be sure that they can sell it off and get their money back quickly.
Cons of using hard money loans
Like most financing options, hard money lending comes with its own set of disadvantages. These are mentioned below:
1. Not all hard money lenders have the same principles. When it comes to banks, you can depend on the fact that they will be using a standard contract for all agreements. Therefore, if you place your trust in a hard money lender who is unscrupulous, you might lose your property to foreclosure. Only work with hard money lenders who have a good reputation
2. Some hard money lenders will also collect non-refundable deposits even when they don’t have the capital required to give you the loan. Their objective can be to abscond with your money. Again, you can avoid this if you work with renown hard money lenders
Deals perfect for hard money loans
Contrary to what desperate hard money lenders will tell you, these loans are not appropriate for all deals. Unsure if your situation requires a hard money loan? Reach out to a lender you trust and who is experienced enough to give you accurate answers. We’ve already mentioned that hard money loans are ideal for real estate investors who need to act quickly. However, there are other situations where it is suitable too, like:
- Fix and Flips
- Construction Loans
- Land Loans
- For buyers with credit issues
What do you think? Is hard money loan the right option for you? Why or why not? Comment below to leave your thoughts!