What is a hard loan and how does it work?

A loan with hard money refers to a type of loan. But what sets it apart from other types of loans is that it is secured in real estate. In addition, they are considered short-term bridge loans or last resort loans. Basically, they are used in various real estate transactions. Lenders are either companies or individuals, not banks. Read on to know more.

Important takeaways

Below are some of the salient features of these loans.

  • They are primarily used for real estate transactions. And this money comes from a company or an individual instead of a bank.
  • This type of loan is usually granted for a short period of time. The purpose is to quickly raise money for a lower LTV and higher cost.
  • Since these loans are not traditionally executed, the financing period is usually quite fast.
  • It is interesting to note that the terms of these loans are negotiated between the borrower and the lender. In addition, these loans use the property as collateral.
  • Although repayment can result in bankruptcy, they still leave a lot of profit to the lender.

How Does a Hard Money Loan Work?

Usually, the terms of hard money loans are based on the value of the property, not the borrower’s credit rating. Since conventional lenders such as banks are not lenders, private lenders or companies are most interested in this business.

These loans can also be a great choice for property flippers who have plans to renovate a property and sell it again. Here you may find that the cost of this type of loan is quite high. But the good thing is that the extra cost is offset by the fact that the loan will be repaid fairly quickly. In most cases, the loan is granted for a period of 1 to 3 years. Apart from this, they offer many benefits as well.

Apart from this, this type of loan is also considered a great investment. You can find many people out there who have done this business and are happy with the practice.

Special considerations

Usually, unlike bank financing or financing programs offered by the government, the cost of these loans is quite higher for a typical buyer. However, this cost reflects the higher risk borne by the lender. But the nice thing is that the extra cost is worth it because the money is available quickly. The approval process is less strict and the refund schedule is also quite flexible.

These loans can also be an excellent choice for dealing with turnaround situations. For example, if you need money fast for a short-term financing but you have a bad credit rating, you can try it. Since the amount is issued fairly quickly, you can use the funds to avert a foreclosure, for example.

Advantages and disadvantages

Now let’s take a look at some pros and cons of hard cash loans.

Benefits

First of all, the approval process is quite faster unlike the process of a mortgage or a conventional loan. The thing is, private lenders are interested in this type of business because they can make decisions quickly without running a lot of checks. In other words, they will not check your credit history. These are the steps that slow down the process and make the borrower wait for weeks.

Usually, these investors only care about the repayments. In addition, they have the opportunity to resell the property if the borrower fails to make payments and becomes a negligent.

Another advantage is that lenders do not apply the conventional issuance process. Instead, they evaluate each case one by one. Applicants can often sit down with the lender and discuss the repayment schedule based on their circumstances. Apart from this, borrowers can take advantage of many opportunities during the time they have. So this is another great benefit that you can enjoy if you choose this option.

Cons

Because the property is used as security against default, these loans have lower LTV rations unlike the regular loans. This ration is between 50 and 70%, unlike the ration for ordinary loans, which is 80%. But if you are an experienced flipper, it can be even higher.

Apart from this, the interest rates on these loans are also higher. For subprime loans, the interest rate can be even higher. In 2019, for example, interest rates on hard money were between 7.5 and 15% based on the period for which the loan is granted. On the other hand, the prime interest rate was only 5.25% during the same period.

Another disadvantage is that these lenders may not offer property loans due to compliance rules and regulatory oversight.

Hope, now you understand what difficult money loans are and the pros and cons of them. For more information, you can consult your mortgage broker.

Leave a Reply 0

Your email address will not be published. Required fields are marked *