Hard Money Loan: Know When to Use It
Hard money loans are loans to borrowers with low credit scores or those borrowers who are considered high risk. These loans will almost always carry a very high rate of interest and should only be considered when other options are not possible. Hard money loans have lower credit standards because hard money lenders charge a much higher rate of interest to account for the higher probability of default across their lending portfolio. Generally, funded by private investors rather than banks, hard money loans are widely used for real estate ventures and bridge loans (or short-term loans). If you don’t have a strong-enough credit score that can secure a bank loan, a hard money loan may be the right option for you.
Should I Use a Hard Money Loan With a Good Credit Score?
There are some cases where you may wish to use this type of loan even if you have a good credit score. The main reason is the timeliness of these types of loans. Hard money loans will help you get funding rapidly compared to traditional loans. A traditional loans (from a bank) usually entails an extensive approval processes that includes in-depth credit checks. Any negative reports on your credit history will definitely slow the process. But even worse, they could cause you to be flat-out denied from getting a loan.
Timeliness is one instance where hard money loans provide a better route to funding. Rather than extensive credit checks, hard money lenders provide funding based on collateral. Collateral-backed loans give hard money lenders the confidence to provide funding quickly. However, not all lenders require collateral. It is quite common to get a distressed loan that is unsecured with collateral.
What Are Typical Repayment Terms?
Hard money loans will typically have a repayment horizon under five years. These are intended as short term loans. From a practical standpoint, you would not wish to hold a high interest rate loan much longer as the cost of funding can be very high over a longer repayment horizon. As mentioned above, the interest rates for these types of loans are generally higher than bank loans.
So why choose a hard money loan over a traditional loan? Hard money loans are often taken out when there are no traditional borrowing options (from a bank or other lending institution). These types of loans are quite common in real estate investment projects or other investment property projects. Traditional lenders typically avoid financing unfinished projects. Whereas, hard money lenders can give you funding for construction.
Remember, bank loans are regulated by the Federal Reserve. Hard money loans are not regulated by federal agencies. Therefore, you will go through a different process for applying to get a hard money loan.
Why Should I Use Hard Money?
Yes, hard money loans are more expensive than traditional loans. So, what are the pros of using one?
Easier Approval: one of the biggest factors that prevent businesses from obtaining traditional loans is credit history. Whether it’s bad history, or simply minimal history, credit can make or break your ability to secure funding. Not with hard money loans, however. Rather than focus on credit history, hard money lenders obtain collateral against the loan. For example, you can take out a hard money loan against a property. For the hard money lenders, the property value will be the most important factor. Meanwhile, credit history is largely ignored. In many cases, you can even obtain a hard money loan even with a foreclosure on your credit history.
Hard Money Lenders Offer Flexibility: while it can be very stressful to deal with big banks or corporations, hard money lenders are usually more flexible. Often, you can speak to an actual person who can offer you tweaks to your loan plan. Each loan is dealt with on a case by case basis, so you’ll receive better options.
Rapid Funding: perhaps just as important as their easy approval process, hard money lenders provide funding fast. Hard money loans are signed and delivered faster than any traditional loan process. This is due to the collateral that backs the loans. Since the approval process isn’t extensive, the loans get closed very quickly.
What Are the Drawbacks of Hard Money Loans?
There are a lot of great reasons to go for a hard money loan. Especially when it seems impossible to secure funding from a bank. However, it is important to keep in mind the drawbacks of hard money.
Loan Rates: make sure you evaluate all of your options. Consider sustainability of your funding before signing. While other traditional loans are harder to get, they offer lower cost options. Hard money loans can be often reach interest rates in the double-digits.
Finding the Right Hard Money Lender
So, you know what a hard money loan is. You know the benefits one can bring you. The next question you should be asking yourself is: where do I find a reliable money loan? It’s important to distinguish between safe hard money loans and loan sharks.
- Ensure the hard money lender has a credible online presence. Be wary of some phishing websites designed to look like hard money lenders.
- Check the hard money lender’s portfolio. It is crucial to find a hard money lender that has dealt with business ventures similar to yours. This can ensure a good working relationship and the right loan for you.
- Avoid lenders with pending lawsuits. As earlier stated, you can run into sketchy lenders. Make sure to steer clear from these organizations to ensure your business ventures are protected.
What Do I Need to Receive the Best Hard Money Loan?
Collateral is an absolute must for any hard money loan. However, you need to have a solid business plan put together in order to receive any viable funding. Along with this, you will need your own funding up front to supplement the loan. Here’s what hard money lenders require:
- Roughly 40% of what is needed for the ARV (after-repair-value) of your real estate property. While this figure applies to real estate ventures, you can apply it to any venture requiring hard money.
- Hard money loans will provide you with roughly 60% of the venture cost. Thus, your 40% will be necessary.
- Having the right up-front funding will guarantee approval for a hard money loan. Don’t expect to receive 100% ARV for a hard money loan.
- The amounts you can receive will vary between lenders.
Additionally, be prepared to disclose financial documents such as bank statements, W-2 forms, and even paystubs. This is standard practice for acquiring any hard money loan.
Make sure to protect yourself legally. Always be aware of the liabilities that come with borrowing money.
After the Hard Money Loan is Secured
Now that you have received your hard money loan, you need to get to work. Remember, this is a short-term loan. You must move quickly with developing your property and getting it on the market in a reasonable amount of time. This will ensure you avoid getting caught by interest fees.
Additionally, keep in touch with your hard money lender. Keep them updated on your business venture progress. Always provide information in a timely manner when requested. This will ensure you get your hard money loan paid off quickly. You will also avoid any problems with missing out on assets.