Aspiring real estate investors whose credit scores are below average can sometimes face problems trying to get property loans financed. There are times when money is needed quickly to secure a business transaction, but traditional mortgage lenders typically need some time to review your history before granting a loan. When this happens, hard money loans become a reliable second option in swiftly getting the necessary money to fund an investment.
Hard money loans are the same as traditional loans in that you can use them to finance a business, a car, or your home. The main difference is that in a hard money loan, you need to secure it by lending a hard asset as collateral. Hard assets include anything tangible that is considered valuable, such as real estate and automobiles.
When to Think About Hard Money Loans
Financing through hard money loans is typically considered by people who do business in the real estate industry. Due to the competitive market, an investor must secure a good listing right away by paying the necessary fees before the next buyer.
When you apply for a loan at the bank or a government financial institution, they go through a series of processes such as checking your background, your financial history, and your payment capabilities before approving the request. Depending on the property, they might also send an expert to reassess its value to make sure you are not declaring more than you should on your loan application. While this is a standard approval procedure, it can take too long to materialize and cause the investor to lose on the potential purchase.
Hard money loans offer a significantly faster approval process because they do not need to review the loanee’s capability to pay back the money. Instead, they need to secure hard assets with value relevant to the amount being loaned. If the loanee fails to meet the payment agreement, the loaner can sell the assets to get their money back.
How Long Does a Hard Money Loan Take?
Hard money loans, or private money loans usually funded by private investors, do not usually take more than a week to get approved. Since no strict processes are in place to check the finances of the loanee, the processing time for hard money loans is much faster than traditional lenders.
Hard money financing can also be used by businessmen as a bridge loan, which means to bridge the gap between the initial funding and the long term investment costs on a project. For instance, when a person tries to start a rental property business, he (or she) gets the initial funding through a hard money loan. Once the property is secured, he (or she) will need more funds for renovating the property until it looks good enough to rent. That is when the same person goes to a traditional lender, such as the bank, to fully pay off the hard money loan and avoid longer high-interest fees.
Are Hard Money Loans Legal?
Yes, hard money loans are legal. However, like all other loans and investments, hard money loans come with its own share of risks and benefits. Before agreeing to any contract, it is best to read the fine print and make sure you can afford to pay the agreed terms so that you won’t have to lose your collateral.
Hard money loans generally cost more for the loanee than traditional financing institutions, but that’s the price you have to pay for the fast and convenient processing. Additionally, the loaners take more risk by giving you money in exchange for assets and a promise to pay, with nothing else necessary regarding your financial background.
Since hard money loans do not go under the same rules and regulations that other financial lenders are obligated to, there are no fixed rates or set numbers. You can always discuss the terms of the deal with the loaner before pushing through to make sure that your payment capabilities can handle the conditions.
Investing in real estate may need a significant amount of money because properties cost a lot. When a good deal comes up, you need to have a hefty sum in hand to secure it before someone else takes it. Hard money loans help you do this by swiftly lending you the money you need in exchange for collateral. Just make sure that you study the terms of your loan before finalizing anything to guarantee that you can pay off the loan without losing any assets.