When you think about hard money, the first thing that could come up in your mind is a scene of shady lenders that do their deals in a dark alleyway. But this stigma is actually nothing close to what hard money lending is.
What Is Hard Money Lending?
Hard money lending, simply put, is a loan that is based on the value of a property. Instead of looking at your credit score and your discipline in paying off loans, hard money lending focuses on the property that you will use as collateral.
Hard money lending is not given by traditional banks or credit unions. Instead, it is funded by private investors. This is why it can also be called private money lending. This means that your application time will be a lot shorter as compared to traditional loan applications. However, there is still a process of applying for hard money loans. For example, you will still have to go through an underwriting process. Hard money loans usually have a 12-month term. But you can extend this to up to five years.
What You Need To Know About Hard Money Lending
If you are running out of cash but don’t have the time to apply for a loan, then you might go for a hard money loan right away. But before you jump into your application, know these five things first.
1. It’s Not For Every Situation
You have probably worked this out - that hard money lending is not for everything and everyone. For one thing, it is considered as the “last resort” especially if you do not have a month to spare. But if you have a good credit score and are not in a hurry, then a conventional bank loan is still the best option. A hard money loan only makes sense if you’re caught in situations like land loans, construction loans, real estate bidding, and credit issues.
2. It’s Ideal For Real Estate Investors
Like what was said earlier, real estate investors in need of investment capital are the target market of hard money loans. They can be given as fast as one week if there is no problem with underwriting and requirements. This automatically beats any traditional loan that has to go through a month of processing.
Aside from giving them the money quickly, this money will also be attractive to a property seller because they will be paid right away. Compare this to those who are only applying for bank loans as the bid is being held.
3. The Interest Rates Are Higher
While hard money loans are beneficial to the right people, there’s a reason why you need to think twice in getting one. If there is one thing that makes hard money loans difficult, it would be the high interest rates.
High-interest rates are necessary for hard money loans because they are at greater risk. Rates range from 10-15%, but this can differ depending on the state you are in. For your plan, you can either choose to pay interest first or to pay interest with the principal before making a balloon payment.
4. It Has A Shorter Repayment Term
It was mentioned earlier that a hard money loan can only apply for up to 5 years. Beyond that, you would have to make a balloon payment at the end of your term. This limitation might make people more hesitant especially when most housing loans are paid in more than five years. It also requires you to pay monthly, so it can also be heavy if you will not get enough cash on hand.
5. There Are Many Hard Money Lenders Out There
Contrary to what others think, there are a lot of hard money lenders out there. There are many ways to find them and one effective way is to simply search “hard money lender + [area]”. You will be given a list of the money lenders in your area.
But even if it’s easy to find one, you should still be open to other options. Try to get a quotation from a few selected hard money lenders so you get an idea of what a good deal is. Each lender will have a different rate and setup so it’s best that you see all your options before getting a loan.
Conclusion
While hard money lending is ideal for real estate investors, you should know that it doesn’t work for all. The quickness of getting a loan is a good thing, but it’s better to take into account the term and the interest rates as well.
