Hard Money loans are private loans that fall outside the scope of the traditional mortgage lending market. These loans are usually funded by private investors or funds, and are based on the value of the property being used as collateral.
If a borrower needs a loan fast, or does not have the prerequisite credit history or income for a traditional loan, hard money might be their best option. Here are the basics on what a hard money loan is, the benefits or getting one, and the potential drawbacks a borrower might face.
What is a hard money loan?
Most traditional loans are based on the credit history, source of income, and financial reputation of the borrower. They are longer term in nature, and are designed to help borrowers purchase their primary residence.
These processes are historically slow, and if you have any dings on your credit history or have lost your job at any point in the past two years, you might not qualify at all.
Hard money loans are based on the value of the collateral, not the history of the borrower. If anything happens, hard money lenders plan on using collateral and reselling it to regain their investment.
What are the advantages of a hard money loan?
The key advantage of a hard money loan is that they are fast to approve and depending on the property, relatively easy to acquire. You can receive a hard money loan as quickly as a week, even if your credit history is poor.
What are the cons of a hard money loan?
Hard Money Loans always have higher interest rates than their more traditional counterparts. Traditional loans usually offer 5% interest rate on their loans, while hard money loans offer 13% or even more. While this is something to consider, remember that because the loan term is only about a year, interest rates will not roll over to the extent that a more traditional loan might. For example a 30 year loan at 5% of 100,000 will lead to a payback amount of $192,000, while a 12 month hard money loan at 13% for the same amount will lead to a payback amount of $113.000.
While hard money loans are more expensive, they can be a quick efficient way to receive funds for a business project or real estate investment.