The Advantages of Hard Money Loans
It offers immense benefits that aren’t typically available through large banks or lending institutions. Some of the benefits include:
- Minimal Conditions: In order to obtain, a borrower needs to satisfy a short list of criteria whereas a bank has many set-in-stone conditions that need to be met. This may include income history, credit report, etc. The entire process can become drawn out and the borrower, ultimately, may not even be approved in the end. In contrast, these loans are fairly simple and straightforward. If the hard money lender assesses that a borrower’s target real estate investment is an excellent value and the borrower has at least 20% equity to put into the deal, it is likely that the investor will qualify.
- Quick Loan Approvals: You can get it approved far quicker than traditional banks or financial institutions – which may take at least 3-4 weeks. In many cases, a borrower can receive approval and financing within a week – especially if requested documents are presented in a timely manner. The main reason hard money lenders are able to approve loans quickly is that of the short list of required documents and the smaller size of the lender’s organization which doesn’t have to deal with the corporate red tape that banks do.
- Lenient with Credit History: It will also be more lenient with your credit history. If you apply for loans from top financial institutions, one of the main factors they will check is your credit. If a borrower doesn’t fit within a bank’s strict “credit box”, the chances of qualifying for the loan becomes significantly lower. In the case of hard money lenders, credit history doesn’t matter as much as the value of the asset and the borrower’s equity – or “skin in the game”. As long as both meet the expectations of the lender, you have a good chance of obtaining the loan.
- No Prepayment Penalties: Another significant benefit is the absence of prepayment penalties. If you take out a loan from a large financial institution, you would most likely be hit with a prepayment penalty if you pay off the loan prior to the maturation date. You can avoid these fees by opting for hard money loans. It is not difficult to find a hard money lender willing to lend you money without prepayment penalties baked into the term sheet.
Even though hard money loans do offer the above-mentioned advantages, they are not completely without drawbacks. Some of the disadvantages of hard money loans include:
- Higher interest rates. Since the lender is taking on extra risk by lending on a property that is not financeable by a bank and on a borrower that wouldn’t qualify for a bank loan, a higher rate of interest is usually in play. This is an important factor to keep in mind when deciding whether or not to opt for a hard money loan.
- Shorter-Term Loan. If you are looking for long-term funding, you may find it difficult to get a hard money loan. A conventional bank may be a better bet if you need financing for longer than 12-18 months.
If your real estate investment is in your near location, then it may be much easier to apply for since you will find many lenders willing to offer them. However, before jumping the gun and applying from all available lenders, keep in mind that you should spend some time researching them in order to find the best lender.