When you know the hard money basics and how hard money loans work you will be able to make a more informed and educated decision whether or not to take on such a loan. Typically, a hard money loan is the process of borrowing money from a person lending money without using any traditional mortgage lenders.
- These loans typically come from different individuals or private investors. These people lend the money in most of the cases based on property that you are using as collateral.
- Hard money loans are quick loans and are suitable for borrowers who are in immediate need of money.
- It is also suitable for people who cannot borrow from any traditional lenders or their loan applications do not get approved even on https://www.libertylending.com/ or other online lending sites.
Though these loans seem to be the best option in such situations, it is better that you know how these loans work. You will then know what to expect and what you are getting into.
About hard money
When you wish to take out a loan from any sources, you will need to make the creditors believe that you will be able to repay the loan within the stipulated time along with the interest.
- In order to know your ability to repay, the creditors will usually be interested in your credit scores. This will enable them to assess your creditworthiness.
- They will also Look at the income available as well as your previous loans if any to which you are obligated currently.
If your credit report shows a solid history of borrowing and paying your debts responsibly, they will assume that you are quite able to pay your loan and will make an offer. This is the process of finding the debt to income ratio. It is only when the debt to income ratio is favorable, you will easily get approved for a loan.
The speed of the process
Typically, when you go for any traditional loan from a bank, the paperwork and verification process along with the other formalities make the entire process painfully slow. You will have to wait for a long time to get and approval and then get your loan disbursed.
- Even if you have a great credit score and a plenty of income from different sources and your debt to income ratio is also favorable, the process will take its usual time.
- It will be even slower if you have negative items and entries in your credit reports.
- The process will take even longer to complete if there is an income that is difficult to verify by the lenders to their satisfaction.
Anything negative or contradictory will have your loan application rejected.
On the other hand, when you go for a hard money loan, you will see that the hard money lenders follow a completely different approach. Typically, they make their loan offers based on the specific collateral and its value securing the loan. In fact, they are far less concerned about your ability to repay as opposed to then traditional money lenders.
- They know that if anything goes wrong and you are unable to repay, they will have the collateral to get their money back.
- They will take it from you and sell it in order to recover the money due.
Therefore, to all money lenders the value of the collateral is very important than the financial position. It is for this reason you will get a hard money loan much quickly than any other loans taken from any other traditional source of money lending.
All hard money loans are normally short-term loans that lasts for only for one to five years. However, no borrower wants to keep these loans longer than that time anyway. This is because rate of interest for hard money loans are generally much higher than the traditional loans.
Using hard money loans
At this point you may wonder why take hard money loans if these are really expensive. Well, it is for the simple reason that hard money loans are very useful for a certain set of borrowers who cannot avail traditional funding from any traditional sources when they need it.
- These loans are also available in quick time because the hard money lenders do not conduct any thorough verification of documents like your income and bank statements. Moreover, if you can build a good relation with the lender then you can receive these loans much more quickly. The fact that the hard money lenders can close a deal much faster than any other money lending sources makes these loans so important especially in hot markets with multiple offers.
- Flexibility in the hard money loan agreements is another reason to avail these loans by the people who need it. Traditional loan agreements will have several complex terms and clauses but the hard money lenders do not use such standardized underwriting process. Instead, the hard money lenders evaluate each of their deal individually and depending on your current situation you may even be able to make some small changes in the repayment schedules. This is because you are actually borrowing from a person or an investor who is willing to talk but the traditional loans on the other hand is borrowed form large corporation that have very strict lending policies.
Most importantly, most of the hard money lenders will ideally keep loan-to-value ratios or LTV relatively low. In typical cases the highest LTV ratio can be 50% to 70%. This means that the lenders know that they can sell your collateral property quickly and therefore have a reasonably fair chance to get their money back.
It makes sense
There are a few times when using a hard money loan makes sense. This is important to know because you will need assets to qualify for such loans. It is the best option if you are in need of short-term loans or a fix-and-flip investor.
However, since these loans are fairly expensive, make it a point that you have a proper plan and work accordingly to make your profits materialize.