When it comes to purchasing real estate, standard bank loans are not the only way to go. The so-called “hard money loans” are a viable alternative, and it seems to be getting increasingly popular on the market. In the past, the term has gained some notoriety due to dishonest lenders tricking people with hidden interest rates or difficult approval processes. Nowadays, however, there are regulations in place that make this type of loan safe and secure. In this article, we will take a look at the many benefits of hard money loans.
How Do Hard Money Loans Work?
While traditional loans are based on the creditworthiness of the borrower, hard money loans are mainly based on the value of the property that is to be purchased. In such deals, the property serves as collateral. Professional hard money lenders are usually private individuals or organizations that are willing to risk undertaking such a venture. Hard money loan rates are higher than those of traditional financing, in order to compensate the lenders for the aforementioned risk.
On the other hand, hard money loans are meant to be repaid in the short term. To illustrate, a typical hard money loan is repaid in a period of one to three years. Some people view hard money loans as a last resort for unemployed people or those with bad credit ratings. That cannot be further from the truth. For example, many self-employed people find it hard to prove consistent income to banks in order to get a loan. With a hard money lender, that will not be an issue.
The Benefits of Using Hard Money Loans
Now that you know what hard money loans are, we can get started on the numerous benefits they offer for borrowers. When it comes to a conventional loan vs hard money, there are pros and cons to each method. However, let’s focus on the positive sides of hard money loans since there is plenty of false information regarding them that has the potential to scare you off.
Easy to Get
As we already mentioned, if you apply for a hard money loan, you do not have to go through the same approval process as you would with a bank. With traditional loans, the lender must verify your income and choose the amount based on your desired property’s appraised value. Those are just the first two steps of a lengthy process that can be very challenging to pass. Very often, even a small problem with your application can result in a rejection.
With a hard money lender, you will not have to prove your income or have a clear credit history. Hard money loan requirements only need an appraisal of the property in order to determine the amount of money you need. It is important to point out that a hard money loan is always equal to the value of the real estate you want to purchase.
Faster than the Alternative
One of the key benefits of hard money loans is that getting them is much quicker than waiting on a bank, for example. Since private lenders do not do extensive checks on potential borrowers, your loan can be approved in a matter of days. As you can see, hard money loans are especially useful for time-sensitive deals.
In contrast, banks can take as long as 30 days to approve your loan. Since the real estate market is quite dynamic, this ends up being a problem for many investors.
As Convenient as It Gets
Hard money lenders do not adhere to the standard underwriting process. Instead, each loan request is evaluated on its own and is a unique case by itself. As a result, you as a borrower can negotiate more favorable terms. Even hard money loan monthly payments can be renegotiated with some lenders. During the set time period, you can ask for or discover more opportunities to pay back the loan.
Flexible In the Long Run
With a traditional loan from a bank, you will find it especially hard to get a new loan for another property you are interested in. A good investor would use hard money loans to purchase several properties in a small amount of time. If you are interested in making more real estate purchases in the long run, making use of hard money loans is an excellent way to go. Investing in real estate is always a smart idea and hard money lenders can help you on your way to success.
Hard Money Loans Are a Good Alternative to Traditional Financing
As you can see, there are many factors that make hard money loans preferable to standard financing means. They are very fast and easy to get and extremely convenient even for people with bad credit history. If you aim to become a real estate investor, hard money loans are the best tools you can use. The benefits of hard money loans are simply too good to pass by.