Today, Let’s show you all you need to know about hard money lenders, who they are, what they do, and if getting a hard money loan is right for you.
You may need to find alternative financing when you are looking to buy a property that is not listed on any market or doesn’t have an acceptable loan-to-value ratio for a traditional lender.
In this case, a Hard Money Loan might be the perfect solution for you. A hard money loan is a private lending arrangement where an investor provides money to another individual or business in exchange for collateral.
Hard money lenders provide fast funding against high-value assets like real estate, autos, businesses, and other personal assets such as art, diamonds, and even yachts.
A hard money lender specializes in these types of loans with terms and conditions that are much more lenient than most banks or credit unions.
Who Is A Hard Money Lender?
Hard money lenders are individuals or companies that provide quick, short-term loans that are often collateralized.
They are willing to take more risk than a traditional lender because they expect a higher return on investment. Hard money lenders specialize in these types of loans with terms and conditions that are much more lenient than most banks or credit unions.
The money they lend comes from the capital they have invested in their business and are looking to earn a healthy return on that investment.
The borrowers seeking hard money lenders are often those who have tried to get a loan from a bank or other traditional lending institutions but were denied.
For example, if a bank has turned you down for an investment property loan, you may want to consider going with a private lender like a hard money lender.
Why? Because banks are very strict on the requirements, they need to hand out loans, and often, these requirements don’t match up with what you need for your specific project.
In this case, it’s best to go with someone who can give you the funding you need without all the hassle or delay of getting approved for traditional financing through another financial institution.
What is the Difference Between a Hard Money Loan and a Traditional Loan?
A lien secures a traditional bank loan on the property purchased with a mortgage.
Lenders are extremely careful about the borrower’s creditworthiness and require a detailed analysis of the property.
In contrast, A hard money loan is a short-term loan that typically offers a higher interest rate than a traditional loan. It is usually a last resort for a business or real estate investor when they do not qualify for a traditional loan or if traditional lending sources are unavailable.
Hard money is usually reserved for real estate deals where the investment is expected to have a significant return within a short period, such as purchasing a property for renovation.
Hard money lenders are much more lenient than banks regarding your financial history and credit score. You should have little difficulty obtaining a hard money loan if you have sufficient funds to make a significant down payment.
Because hard money lenders are not as concerned about the property’s value, they are willing to lend more money on a larger purchase with a shorter payoff period.
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Why Use a Hard Money Lender?
A hard money lender is far more interested in the equity you have in your assets than a bank. Banks are more interested in your ability to repay the loan based on your income, assets, and credit score. Hard money lenders have little interest in your income or credit score. They are primarily concerned with the asset’s value pledged as collateral for the loan.
Hard money lenders will lend to people with less-than-perfect credit and those with a history of bankruptcy or foreclosure. They do this because they believe that the investment will quickly pay them back, and they make their profit on interest rates and fees charged to borrowers.
A hard money lender can offer you a larger sum of money than a bank can because they are lending against an asset that is already owned by you. Banks are more likely to lend you less money than what you want because they do not want to put too much of their capital at risk when lending out money.
What is the minimum requirement for a Hard Money loan?
The minimum requirement for a hard money loan is usually around 20% of the total asset purchase price.
This is a good rule of thumb to keep in mind when looking to borrow against assets like a car, boat, art, or jewelry.
In the case of real estate, hard money lenders typically require anywhere from 10-30% down payment. The amount of equity you have in the property will determine the amount of funding you can receive.
The Pros of a Hard Money Loan
The biggest advantage to using a hard money lender is that they can provide large sums of cash for very risky investments, such as real estate flipping in a short period of traditional banks won’t work with you or if traditional loans aren’t available due to recent economic downturns.
Access to additional capital: Hard money loans are unsecured, so they do not have the same collateral and credit history requirements as banks or other lenders. This makes these loans ideal for those who need to access additional capital but don’t have the perfect credit score.
Quicker closing: Because a hard money lender does not need to perform a detailed analysis of your credit history, it is much quicker to close the loan. It might take several weeks to get a loan from a bank, but a hard money loan can often be closed within 2-3 weeks.
Significant down payment – A hard money lender does not require a significant down payment as a bank does. Instead of requiring a 5-20% down payment, a hard money lender might only require a 10% down payment in terms of real estate.
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Drawbacks of a Hard Money Loan
Higher interest rates – Because hard money loans are unsecured, lenders are required to charge a higher interest rate. Hard money loans usually have interest rates that are 2-3 times higher than a conventional loan.
Stricter repayment terms – Because hard money lenders are not concerned about collateral, they are far more lenient in their repayment terms. The terms of a hard money loan are usually much shorter (6-36 months) than those of a conventional loan.
Unrealistic appraisal – One of the biggest drawbacks in securing a hard money loan is the need for an unrealistic appraisal. Lenders sometimes request an appraisal that is higher than the actual value of the property to ensure proper repayment.
How to Qualify for a Hard Money Loan?
Because a hard money lender does not care about your credit history, you’ll need to find an individual rather than a traditional lender.
You can find a hard money lender by talking to friends, family members, or through a real estate agent. It is important to shop around and talk to several hard money lenders before choosing one to partner with.
The best way to qualify for a hard money loan is to find a lender who is willing to work with you. This is critical because the lender will need to be able to understand your situation and be willing to make an exception.
Before you approach any lenders, ensure your financial situation is in order. You’ll want to present yourself as a reliable borrower with a strong financial history. This might require some preparation on your part, such as paying off debt or getting your credit score up to snuff.
How to Find a Hard Money Lender?
The easiest way to find a hard money lender is through a real estate agent. Most real estate agents are familiar with hard money lenders in the area and can help you find the right lender for your situation. Real estate agents are also a great resource for advice on how to get the best deal with a hard money lender.
What is the Repayment Rate for Hard Money Loans?
Hard money lenders charge higher interest rates for the loans (2-3 times higher than a conventional loan). The actual repayment rate is determined by the amount of equity in the asset you are using for collateral. If you have good equity, the repayment rate will be lower. If you have no equity or negative equity, the repayment rate will be higher.
Is a Hard Money Loan Right for You?
Before you dive into a hard money loan, make sure you understand the risks and benefits associated with this type of financing.
Hard money lenders are much more lenient than banks in terms of your financial history and credit score. As long as you have sufficient funds to make a significant down payment, you should have little difficulty obtaining a hard money loan.
In general, hard money loans should not be used for long-term investments such as buying a house for yourself or starting a business that requires long-term growth and expansion unless you have an extraordinary amount of capital to risk losing.