Personal finances are an important part of your past, present and future. After all, you need money not only to survive, but also to do the things you want to do in life. Sometimes, you may fall short of your savings goals or need to borrow money to make a big purchase. That's where hard money loans can come in.
What are Hard Money Loans?
First of all, it's important to understand what a hard money loan actually is. This is a specific kind of asset-based loan financing in which the funding is secured by real property. In other words, a hard money loan is a form of funding using real estate/property as collateral, rather than the creditworthiness of the borrower. If you have poor credit or struggle to get a loan from traditional lenders for what is deemed a risky property, a hard money loan could save the day. In a world where debt is so common – 58% of college graduates have student debt, according to the Kennedy School at Harvard's Institute of Politics – hard money loans can make a major difference.
These are short term loans with higher interest rates, issued by private individuals and companies that are willing to take on the risk. Many people use hard money loans in their real estate endeavors, with flipping houses being the top example. Property flippers who want to renovate and resell the property within a year or sooner may turn to hard money loans for help. Although the interest is higher, if the borrower intends to pay off the loan quickly, usually within one to three years, then it can be a worthwhile financial move.
Hard money loans are often easier to obtain than traditional forms of financing, and as long as you do your research beforehand and choose a qualified, suitable hard money lender, you should have a good experience. While flipping houses and turnaround situations is a primary reason why hard money loans exist, this funding can also assist borrowers with low credit scores but considerable equity in their property. Plus, hard money loans can be issued quickly, so they can be a good way to avoid foreclosure in the short-term.
Hard money lenders pay less attention to a person's credit score and concentrate more on their property assets. If you've been turned away from traditional funding sources such as a bank or mortgage broker, it may be time to explore the benefits of a hard money loan.
What are Pros of Hard Money Loans?
As with anything in life, there are both pros and cons to a hard money loan. Depending on your situation, you may find that the pros far outweigh the cons. Perhaps one of the biggest advantages to hard money loans is that they move quick. You don't need to wait for weeks and months on end to get approved for this kind of funding. Overall the U.S. has a mind-boggling $10 trillion in mortgage debt alone, as reported by the Federal Reserve, so it's crucial that you make the right choice when it comes to your type of loan. If you need money fast, and you don't mind paying higher interest for the short-term, then a hard money loan could be the solution you've been looking for.
Another pro associated with hard money loans is the relatively straightforward and simple approval process. If you have the right criteria, namely a property that can serve as collateral, you may be approved faster than anticipated. So long as you're working with a trusted hard money lender, you may get great financial news. Being approved for a hard money loan is a big moment, especially if you've want to get into property flipping or you've been refused traditional forms of lending.
It can be frustrated and disappointing to be rejected by banks and mortgage brokers time and time again. If you've been let down by potential lenders and you're feeling flat about your financial circumstances, a hard money loan could have a positive impact on your life. That's because these loans are an attractive alternative for those who could not get a traditional loan due to poor credit history or other circumstances. Hard money lenders tend to be more flexible, as they don't use a typical underwriting process when it comes to approving loans. Instead, these lenders evaluate every deal individually, meaning you may be able to discuss repayment schedules, interest rates and more. Rather than dealing with the big banks and large corporations, you may be working with an individual or small-business minded hard money lender who is more likely to meet your needs.
What are Cons of Hard Money Loans?
Of course, it's also important to consider any potential downsides to hard money loans, which will be dependent on your current financial situation. Generally speaking, the biggest disadvantage to hard money loans is that they can be more expensive in terms of interest. Because they are so fast and flexible, hard money lenders are able to tack on higher interest rates to accommodate the loan terms and conditions.
If you're planning on paying back your loan within a few years, the increased interest rate won't be too much of a factor for you. This is particularly relevant for property flippers who know they will be reselling the property for a profit in a short amount of time. For homebuyers who are planning on living in their house for years to come, higher interest rates may pose a concern. That's certainly something to consider when planning for the future and deciding on which type of funding is best for you and your loved ones.
Just like any other funding option, hard money loans aren't perfect. You must keep in mind that lenders may use more conservative methods to evaluate your property than you'd expect. Combined with the expensive fees, hard money loans need to be carefully thought about before signing on the dotted line. If it seems feasible for you, and you've met with a reputable hard money lender and read through everything, then you should know what to expect and hopefully have success with your loan in the future.
If you're interested in learning more about hard money loans and figuring out if they would work for you, then it's time to contact your local hard money lender today. They'll be able to help you further understand this funding and make the right financial move for you.