If the word “hard money loan” conjures up images of quick and straightforward business transactions that result in “cold, hard cash,” you’re not far off the mark.
However, just because this form of loan provides quick funding does not imply that it is a good or safe alternative for everyone. What exactly are hard money loans, and should you be afraid of them? Let’s take a closer look.
What Exactly Is A Hard Money Loan?
A hard money loan is a short-term, non-conforming loan made by people or private companies who accept property or an asset as collateral rather than regular lenders. Borrowers may seek hard money loans when a loan or mortgage application has been declined, or to bypass the lengthy process of obtaining a loan through standard channels.
A hard money loan, like a standard mortgage, is a secured loan that is guaranteed by the property being purchased. The “hard” in “hard money” refers to the tangible item used to support the loan’s worth. When a borrower fails on a secured loan, the lender may seize ownership of the asset in order to recuperate its losses.
Hard money loans, unlike traditional mortgages or other types of secured loans, have a rapid and often less demanding approval process, making them suitable if you need to make the purchase as soon as possible.
Purchasing a home with a mortgage frequently takes more than a month, from application to closing. Hard money loans can be closed in as little as a few days.
What You Should Know About Working With Hard Money Lenders
Private investors or firms that specialize in this form of loan are the most common hard money lenders. You won’t be able to get a hard money loan through your local bank. Hard money lenders are not governed by the same rules as standard, conforming loan lenders. This implies that they are, for the most part, free to set their own standards for credit scores and debt-to-income ratios for their clients. Even if you’ve been turned down by more traditional lenders, you might be able to find a hard money lender who will grant you a loan. The value of the property being acquired is more essential to hard money lenders than the borrower’s creditworthiness.
What Is the Process of Obtaining a Hard Money Loan?
Let’s look at how hard money loans differ from more typical kinds of funding.
Loans of the Past
Though not a formally defined category, “traditional” loans in this context refer to loans obtained through a process that most people are familiar with: you apply for a loan, the lender checks your credit and ensures you have the ability to repay them, and if they determine that your finances meet their standards, you’re approved for the loan.
This category includes a wide range of loans, including mortgages, auto loans, personal loans, and home equity loans. Though it is normally possible to obtain these types of loans from private lenders that do not have the same restrictions as traditional lenders, these private loans might be more expensive and less favorable for borrowers due to the higher risk.
Traditional lenders will examine your complete financial status, including your income, the amount of debt you owe to other lenders, your credit history, your other assets (including cash reserves), and the size of your down payment.
These lenders go through this often time-consuming process to reduce the amount of risk they take on when lending money to an individual. Lenders can offer better rates and overall more cheap lending if they ensure their consumers are creditworthy.