A type of loan that is secured by real property and is mostly used in real estate transactions, with the lenders generally being individuals and not banks. There is considerably less waiting time for a hard money loan, as banks are not involved, and the loan is based on collateral instead of the individual’s financial position. Hard money loans are complex, but professional companies like Lord Mortgage and Loan can help you understand.
What Is a Hard Money Loan and How Does It Work?
Instead of the borrower’s credit history, a hard money loan is backed by real estate as collateral. This is to ensure that if the borrower defaults on payment, then the lender can recover their money by selling the property.
Typical Loan Terms
Typical hard money loan terms are designed for short-term use and fast access to cash. The loan term typically ranges from 6 months to 3 years. Although interest rates are higher than those of traditional loans, usually between 8% and 15%, there are no banks involved.
People With No or Poor Credit History
Hard money loans are for those individuals who either require fast access to cash or have no or poor credit history and are unable to secure a loan with a bank on realistic terms. Real estate investors use hard money loans if they are sure to pay back via house flipping.
Pros Of Hard Money Loans
There are individuals out there who are unable to wait for their bank loans to clear in 40-50 days and, as a last resort, opt for hard money loans. Desperation or emergency is not always the reason people opt for hard money loans. Hard money loans offer several advantages, especially for borrowers in specific circumstances.
Let’s take a closer look:
Flexible Terms
Hard money lenders are typically more flexible than banks, as they are individuals or private investors, they can set terms that have repayment schedules based on your income and cash flow, making it easier for you to repay the entire sum.
Useful For Property Flipping Projects
If you are a property flipper or do property renovations and are sure to make a quick buck, then hard money loans are a great option. Real estate investors are always looking to get a hard money loan as they get access to quick cash without delay.
Easy Credit Requirements
Traditional lenders like banks require income history, solid credit scores, and low debt to approve a loan request, and on top of that, it takes 30-50 days for funding. Hard money lenders are more concerned with the property’s value and how you intend to pay back the amount.
Cons of Hard Money Loans
Yes, hard money loans have a lot of pros, but they are not for everyone, and the biggest drawback is high interest rates, as they are risky for lenders. If you’re not careful and agree to bad terms, it can be difficult to renegotiate.
Let’s go through a few cons of hard money loans:
Short Loan Terms
Hard money loans are mostly short-term, 6-18 months max, and they might be ideal for property flippers and renovators, but not for those who need a significant time to pay back the lender. If you are unable to generate a profit in this timeframe, you could default on the loan payment.
Risk of Losing Your Property
Hard money loans are based on your property as collateral, and defaulting on payments means the lender can foreclose on your property. If the market conditions are not favorable or you are unable to generate a profit, you could lose your investment and property at the same time.
No Regulation By Authorities
It’s a blessing and a curse, as no regulation allows more flexibility; it also means you need to look out for yourself while setting up terms, fees, and conditions. Unlike bank loans, private lenders are not subject to the same rules and regulations.
Conclusion
Hard money loans are for you if you have no or poor credit history, are sure you can repay in time, and need fast access to cash without waiting 30-50 days for bank loan approvals. These are a few positive aspects; however, issues like no regulations, short loan terms, and the risk of losing your property might turn off many people, too. If you’re deciding whether to go for a hard money loan, make sure to secure favorable terms, or you might risk losing your property and investment.
FAQs
1: What exactly is a hard money loan, and how is it different from a traditional loan?
Instead of banks, private lenders offer hard money loans, and your property is used as collateral in place of your credit history and income.
2: Who typically uses hard money loans and why?
Real estate investors, especially property flippers or renovators, can generate a quick profit and pay back the loan on time.
3: Can I get a hard money loan if I have poor or no credit history?
Yes, hard money loans are based on property as collateral, so there is a chance you might get a hard money loan.
4: What are the main advantages of using a hard money loan?
Easy credit requirements and flexible terms by private lenders are a few advantages of using a hard money loan.
5: Is a hard money loan a good option for real estate flipping or renovations?
Yes, if you’re into house flipping or property renovations and can generate a quick profit, then a hard money loan is a good option.