What is the Concept Hard Money Loan? How is it Important?

When you are planning on getting a loan, it’s best to know your options. Speaking of options, you might have come across hard money loan. It’s not exactly the best type of loan to use for starting your business or to purchase CFD stocks, but it’s still worth it. It comes from individuals who lend money by taking your property as collateral.  

Introduction to Hard Money

Mostly, when you are applying for a loan, lenders require proof that you will repay it. For that, they check your income and credit score. Your loan only gets approved if you have a history of repaying your loans responsibility.

The problem is, getting your loan application approved from a traditional lender is slow and painful. It’s frustrating even if you have a great credit score and a steady stream of income. In case you have a negative item on your report or an income that is a little difficult to verify, the process of approval may take longer than usual. Chances are your application isn’t approved in the first place. This is where hard money loans come to play. However, these loans are ideal for real estate investors who flip homes.

How much money will the lender lend you depends on the worth of the property in question. It can be the property you already own or you are acquiring. The lenders care about the value of the property instead of your credit score. If you are a borrower who is having a hard time getting a loan because of a short sale or foreclosure, this loan is for you. If you have enough equity in the property that you are planning to use as collateral, you still qualify for this loan.

Why Use Hard Money Loan?

Presenting your property as collateral is a bold move but hard money can be your only resort because of the following reasons:

  • It’s fast: Since the focus of the lender is the collateral, this type of loan closes quickly as compared to a traditional loan. They don’t have to spend time verifying your income, checking your bank statements and performing other evaluations. If you have a relationship with the lender, the application will move even faster.
  • It is flexible: The agreements of a hard money loan are more flexible as compared to that of a traditional loan. There is no underwriting required. The lender evaluates each deal individually. You can also tweak your repayment schedule. Why? Because you are borrowing from an individual, not a large corporation that has standard policies to follow.
  • Its approval is certain: The most critical aspect of hard money is collateral. So, as long as you have the collateral, your application will approve. In case it is an investment property, the lender will lend as per the worth of the property. In other words, the lender simply cares about the value of the property. Negative items such as foreclosure or anything else on your credit report matters less. Chances are the lender won’t even bother looking at your credit report. Mostly, lenders keep the LTV (loan to value) ratio low. It’s 50 to 70 percent at max. They hence have a reasonable window of getting their money back. And if they do not, they can always sell your property.

Requirements for Hard Money Loan

Primarily, the lender is only concerned about the amount of equity a borrower has in the property. Your credit rating does not matter to most of the lenders. Like mentioned earlier, issues such as foreclosure and even short sale are overlooked.

However, the lender certainly considers the plan of the borrower regarding the property. You as a borrower are supposed to give a plan about how you intend to pay off the loan.

Pros

Some people think hard money loans are for investors with a bad credit history. That is not always the case. Check out its pros for further clarity:

  • Hard money lenders recognize that neglected and distressed property can offer high profit margins. This is exactly why they are willing to fund them. Banks, on the other hand, don’t lend on a property that doesn’t meet their lending criteria.
  • Hard money lenders can help you big time on finding great deals. They can point you towards the right agents and contractors. Some of them are even willing to evaluate your deal for free. They can turn out to be great partners.
  • If you are able to complete your project early, you can pay back the loan earlier. And there is no pre-payment penalty.

Cons

  • You might have to pay a higher interest rate on the loan. Since it is a distressed property, the lenders offer a rate between 9 to 15 percent.
  • You have to pay at least 20 percent of the purchase price and its closing. If you are a newbie, coming up with that much money can be hard.

Final Words

Depending on your financial need at hand, hard money loans are not a bad choice after all. Since the turnaround is quicker, it’s an attractive option even for a trader online. Before you approach lenders who are willing to offer this type of loan, make sure you do your homework.

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