What is Hard Money? The Advantages and Disadvantages of Using Hard Money
Hard money is a borrowing method where you let go of the conventional mortgage lenders. Instead, you opt for loans from investors or individuals using your property as collateral. If you need a quick loan and traditional lenders do not approve a loan, the only other option is hard money. So, let’s find out how hard money works.
Hard Money – Here’s What You Should Know?
You need proof to repay off your loans. Usually, lenders need to keep a tab on the credit scores to approve your loan. If you have a clean finance history and have borrowed responsibly in the past and the capability to repay your loans, you will be gauged on your debt to income ratio, and your loan will certainly be approved.
Getting your loan approved by a conventional lender isn’t a very easy process, even if you have a great credit score to boast of and a good source of income at hand. If you have chinks in your credit armor, then the process invariably gets slowed down. Moneylenders who lend hard money have a different take since their loan depends on the collateral in getting you the loan. Instead of your capability to repay them, hard money lenders take away your collateral and sell it off.
So the collateral value is much more than your current financial situation. Hard money loans are not for the long-term, and they can last till five years. Keeping them for more than the stipulated five years is a tough proposition anyway as the interest rates are higher than the traditional loans.
The Advantages of Hard Money!
Your first thought, on hard money? It is too expensive, but when you need the money and do not have the time or credit score for traditional funding, the only way out is hard money. Another feature that tips people in favor of hard money is the loan can be resolved quickly. Hard money lenders do not spend much time combing through every detail of your income, your bank statements, et al.
Hard money contracts are much more flexible than conventional loan agreements as lenders don’t use a standard underwriting process. The lenders, instead, look into each deal and treat it individually. What you may need to do is change the repayment timings and all. It may work when the corporation is not large with stringent policies.
It’s All About the Collateral
Lenders consider only the collateral while you go for a hard money loan. When you are buying an investment property, the lender will lend the amount according to the property’s worth. Some lenders may not even take a good look at your credit. It’s your collateral, that’s it! Most money lenders (hard) keep the LTV ratios (loan-to-value) ratios fairly low. The ratio may be around fifty percent to seventy percent, so you need assets to qualify for the hard money. This way, lenders can easily get the money they lent in the first place.
The Cons That Nobody Talks About!
Hard money is expensive, and you have to work hard to make things tick as per your plans to help materialize profits. When you borrow money on your not-so-great credit, you have to pay interest in double-digit numbers, and you may also have to pay the origination amount to get the fund.
It is different from the conventional ways of lending money, and lenders may use several conservative methods, different than what you expect. If you can’t find a lender because your property is in shambles, you may get a loan to rehabilitate your property.
How to Find Hard Money Lenders?
If you want to borrow money, you have to first find good investors. And then, you should pitch your request and propose your collateral. This process will involve a lot of research and hard work from your end. That is to ensure you find the right lender who will not dupe you of your collateral.
For good options, you can explore real estate investor groups and local real estate agents. They will prove to be a bankable source for options. To kickstart things, look for a few harm-money lenders in your area. You can discuss your requirements with them and opt for the one that caters to your needs. Also, try talking to your financial advisor to know if this is the right loan for you!
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