The ABCs of Hard Money Loans and Their Benefits

The hard money lending market

Hard money loans seem to be a trend today. No wonder! Borrowers are finding it harder to get money from banks. Their credit rating is too poor; banks are reluctant to take risks; the work involved in fixing the property may be too onerous and ominous. Real estate news shows that the volume of people who are being turned down for loans is increasing. Potential borrowers have an option and that is to turn to hard money lenders.

What are hard money lenders?

These are people who will lend you money based on your assets not on your credit. So, for instance you may have a history of bankruptcy, foreclosure, or low credit – never matter! The lender looks at the value of your property – how much it will be worth – and loans you accordingly. Typically, loans will range from 50 to 70 percent of the value of your property. Many people find this terrific since it helps them get loans in the direst of times.

Other advantages?

Banks take at least 30 days to sift your information and to consummate the loan process. Hard money lenders, in contrast, take as short as 2-3 days. Some even approve you within a day! This is terrific when you want to impress a buyer with your fast bid and when you want to jump to the front of the queue. Hard money loans, in short, give you fast turn around and a super quick response. They also avoid the hassle of numerous bureaucratic meetings and endless document reviews that you would have to do in the traditional bank situation. All your money-lender would have you do is sign a few forms and wait until your loan is approved.

Disadvantages?

On the other hand, hard money lending is notorious for its high interest fee – double than that of the banks. This is understandable from the point of view of the lender – he, or she, is taking a huge risk, therefore he or she has to make a profit. On the other hand, the high interest can be difficult for the borrower to repay.

Is a hard money loan a good idea for me?

If you’re in the situation where you want to quickly flip a house before the market turns or you need a fast loan to finish some urgent construction and you are rejected by your bank – getting such a loan sounds ideal. Some people apply for such a loan when they’ve bought a house but haven’t sold their existing one, or have bad credit but lots of equity in the home and want to avoid foreclosure. In short, borrowers apply for these kind of loans when they’re turned down elsewhere and need financing in short order. For this reason, such loans are also called ” bridge loans ” in that they help you deal with a difficult financial situation. What some borrowers do is that they get the loan, flip the house (or do what else is needed) and use a conventional loan (i.e. bank money) to repay. You may want to consider that route.

On the other hand, if you’re considering long-term work or a long-term loan, I suggest you look elsewhere. Hard money loans will turn out too costly and misery-wrecking for you.

How do I find a reputable hard money lender?

Be careful! There a lot of “bad apples’ in this field (as there are in others). Ask your network for help. Use Google to research lenders in your area and verify their experiences via a consumer bureau and via their online profiles. Shop around and look at their varying rates, costs, and other qualifications. Take your time since you don’t want to lose your house or end up in an endless cycle of debt.

Finally, if you need a short-term loan and decide to go into this, ask your attorney to review all legal documents before signing. You want to be pleased with your choice.