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What Is a Hard Money Loan? Pros & Cons

A hard money loan is a type of loan that provides an opportunity for people in need who cannot get approved by traditional banks to borrow the funds they need. It’s considered loans of “last resort” or short-term bridge loans and is primarily used in real estate transactions with lenders generally being individuals or companies rather than financial institutions like banks.

KEY TAKEAWAYS

  • Hard money loans are the perfect option for those who don’t have a lot of time to wait on bank approval and need cash right away.
  • A hard money loan is a quick way to borrow and pay back, but it comes at the cost of higher interest rates.
  • One of the most appealing aspects of hard money loans, as opposed to traditional bank financing, is that they are quick and easy.
  • It are a type of loan where the lender and borrower can negotiate terms. Often, these types of loans take property as collateral for repayment.
  • Default by the borrower can still be profitable for a lender through collecting collateral.

How does a Hard Money Loan Work?

These are risky ventures for private individuals and companies who may see the potential in your properties. Hard Money lenders don’t rely on credit scores but instead base their terms based mainly on how much value a property has to offer, not what kind of person you are or if you have any history with other lending institutions.

It is a type of financing that is not available to just anyone. Property flippers seek these homes intending to make a profit by renovating and reselling them. This often happens within one year or sooner if not at all.

The higher cost of this loan is offset because these borrowers typically intend on paying off the loan quickly – most hard money loans will only last for 1-3 years at maximum length – which allows them some other advantages in comparison with more traditional types of mortgages like an FHA or VA mortgage. 

You might have lower down payment requirements; no credit score requirement; and shorter repayment periods [the highest balance must still always stay below 80%].

Note – Hard money lending can be seen as an investment. Many people have used this business model to make enough revenue for themselves and actively practice it.

Special Considerations for Hard Money Loans

A hard money loan is a form of financing that offers quick access to capital at the expense of increased costs. These loans are often riskier for lenders because they may not be able to foreclose on properties when borrowers stop paying their mortgages, but this tradeoff can provide some flexibility in repayment schedules and approvals.

Hard money loans are a potential solution for those who have no other options. With hard money, borrowers can receive the funds they need quickly to keep their property and save jobs before it’s too late.

Pros & Cons of a Hard Money Loan

Pros

Private investors make decisions quickly because they don’t have to go through the same process as a bank would. They are focused on collateral, not an applicant’s financial position which will speed up their decision-making time.

With the help of a lender, it is possible to get funds quickly without all the hassle. They will often take less time combing through your loan application and verifying income if you’ve been in business with them before.

Investors are willing to take a risk on loans, but they do have many reservations. They don’t care about receiving repayment as much because there is undoubtedly more value in reselling the property themselves if the borrower defaults.

Cons

Hard money loans are a great option for investors who want to buy houses and make investments. These loans usually have lower LTV ratios than traditional mortgages, so they provide more protection against default.

This is especially helpful when buying distressed properties that need work or fixing up before being put on the market again.

It costs more to get a hard money loan than it does for the average subprime loan. The interest rates vary, but on average in 2020 they were 11.25%.

If you’re looking for a hard loan, it’s best to make sure that the lender is going to approve your owner-occupied residence because of regulatory oversight and compliance rules.

Hard Money Lenders

The hard money lending industry is very small and exclusive. You won’t find these loans at your local bank, but you can get them from individual investors or specialized companies who deal with this type of loan exclusively.

Hard money lenders have a greater sense of freedom than traditional, conforming loan lenders. This means that they are free to make their own rules about what credit scores or debt-to-income ratios they expect borrowers to meet for them to qualify for loans.

If you’re looking for a hard-money lender, don’t be discouraged if more traditional lenders have turned you down. Hard money lending is all about the property and less about your credit history since they lend based on appraised values of properties rather than scores from FICO or other agencies.

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