Last Updated on October 12, 2022 by Umer Mukhtar
When looking for some cash to help fund your projects or even help you navigate through those hard financial times, taking a loan may seem to be a good option. However, finding the right loan option for your needs seems to be challenging with the many loan options.
Table of Contents
What Is a Hard Money Loan?
A hard money loan, also referred to as a rehab loan, is a type of loan that is backed by a hard asset. It means the borrower will post their physical property to act as collateral and be exchanged with money. Mainly this transaction involves real estate investments.
This type of loan is mainly for real estate developers who want to develop or renovate a house then sell it with interest. To qualify for this kind of loan, you need to have a distressed property and somehow in disrepair. Banks do not provide hard money loans; instead, they are given by private companies.
The biggest difference between hard loans and the other type’s loans is that the assets secure the loan. This means that if the borrower has a less solid credit history, his loan will be approved quickly. The financial background is not a factor to help you qualify for the loan.
How Hard Money Loan Works?
Although the financial background is not considered when applying for this type of loan, there are still something’s that play a role in ensuring the loan is approved. The things considered include the borrower’s debt-to-income ratio, home equity, and the loan-to-value ratio. After these are approved, the private company immediately issues the hard money loan.
The lender will first review all the background information for approvals to know if the borrower can commit and pay back the loan. The lender usually takes a high risk in lending out the money and thus lists the home as collateral to resell it in case of anything.
However, there are always good and bad sides to something. Here are the pros and cons of hard money loans.
Hard Money Pros
There are some excellent reasons to consider when going for hard money loans instead of a mortgage from banks. Here are some of the pros.
1. Flexible terms
Conventionally, hard money lenders are private companies; thus, they do not use the traditional underwriting process. In this case, the negotiating is with an individual, not a bank. There is more room for the negotiation of loan terms. The investor may tailor the loan requirement to his own needs.
When applying for mortgage loans it is always time-consuming. It can even take up to a month to close the loan. This puts the investor at risk of losing an investment property. However, with hard money loans, you are assured of closing the loan in a matter of one week. This is important because you can’t deviate from your timeline if you are funding a project.
With a hard money loan, the property serves as the collateral for the loan, but also the lenders may allow the borrower to secure the loan using their assets. This is an added advantage and will ensure you get your loan at any time.
However, there are also the cons for hard money loans with the pros. Here are some of them:
1. Short repayment time
The primary function of a hard money loan is to allow the investor to have their properties on the market immediately. Because of these, the loan features shorter repayment terms than other types of loans. When going for hard money loans, one must know when the property will become profitable so that payment of the loan will be more manageable.
2. High-interest rates
The fact that hard money loans involve the lenders taking the risk in lending the money thus the interest rates are higher. The rates may be up to 10% higher and will cost the investors more.
3. Higher down payment
Hard money loans usually have a high down payment requirement of at least 25%-30%. This cost may be too much for the investors.
Where To Get Hard Money Loans
Many private individuals and companies give out hard money loans in Utah and other US states. They offer friendly terms. You can use website searches to find reputable loaning companies. Make sure to thoroughly review their customer satisfaction and online reviews. You can use third-party websites to review and compare these companies. You can also reach out to other business owners and friends to ask what loaning companies they have used, and what their experiences were with those companies.
Hard money loans are good, but before going for them, pay close attention to the terms and conditions. The borrower should understand the pros and cons and identify the best choice.