Money slips like sand through your fingers. When in abundance, it is somewhat easier to get a hold on it but as its amount dwindles, keeping it secure becomes tougher. Not to mention, the unexpected expenses that intend to crash at the most unforeseen times. In such a scenario, loans are the knights in shining armors.
Around 34% or 83.5 million Americans took personal loans in 2017. Likewise, Pew Research reveals that student loans amounted to $1.3 trillion by the end of June 2017. These branches of loans are extensive, and their needs can be varied. On top of it, the urgency can be a strong itch.
In the case of traditional loans, such an itch can never be satisfied because of the extensive paperwork and background checks backing the money lending process. Such activities feed on time, and urgent cases rarely give you that, which is where hard money loans come into the picture.
Hard money loans are typically short-term loans that take collateral for sealing the loan deal. The approach is to kick the painstakingly slow process of getting traditional loans in the gut. In its stead, these loans grant quick money that you can get as fast as overnight.
Unlike banks that scrutinize details concerning your income and credit score, the property’s value is what matters the most here. The focus of hard money lenders is on the property’s worth that shall serve as collateral.
To this end, these lenders require information such as the property’s purchasing price, a recent appraisal, planned resale price, property location, and the estimated expenses for remodeling. Just like in any other case, hard money loans exhibit both benefits and risks, and a person can only weigh each to see if the balance rests in his favor.
To begin with, you can get hard money loans quickly. In the case of these loans, there isn’t a fine-toothed comb surveying your past loan records, credit scores, income source, bank statements and more. Your property being the collateral is all that matters, and once you hand over its details, the loan is quick and easy to get.
Secondly, hard money lenders mostly work solo. Consequently, there aren’t any complicated bank regulations to trap you. Getting hard money is relatively simple and takes around 24 hours to be approved. It is common that such loans show a ten-day close period. However, in some instances, these deals can be sealed within a few days.
In addition to the simple application and speed of the process, hard money agreements are flexible. There aren’t any hard and fast policies of mortgage lenders to hold you back. Simultaneously, there is no systematized underwriting process in place. Instead, each deal is evaluated individually so that you can tweak a few things such as the repayment time as per your needs.
Lastly, you can get a hard money loan despite issues on your record. For instance, bankruptcies, recent short-sales, foreclosures, and loan modifications can be hurdles in getting a loan approved. Since hard money loans are based on assets, such issues cannot prevent you from getting the loan. This is the reason why a hard money lender concentrates on borrower’s equity.
On the flip side, interest charges on hard money loans are high. It makes sense as lenders take risks and the deal is short-lived (generally between 6-12 months). The interest rates can range between 12-21%. There can also be prepayment penalty and associated point rates.
Secondly, hard money lenders commonly charge a closing fee for using their money. In this regard, they usually charge between 2-10 points. A single point equates with one percent of the loaned amount. So a cost of one point on a $100,000 loan would equal to $1000. Therefore, it is crucial for the lender to check all the fees before getting the loan.
Thirdly, these loans can be more conservative concerning the property’s value than you might think. The loan to value (LTV) ratio lies between 50% and 70%. And the property that you put forth as your asset for down payment needs to meet the lenders’ standards, as they take extra measures to get their money back in case you fail to pay back. Thus, you need to plan before seeking such a loan.
Lastly, hard money is not the typical loan that a person takes for changing homes. These are best suitable for construction loans, fix and flips, land loans, and for real estate investors.
All in all, hard money loans showcase both merits and demerits. These have a conservative take on the value of the property, have high-interest rates, and soaring fees as well. These risks are, however, combatted by quick money, simple application, and flexible process. You can also get a loan even if your borrowing record is not spotless. It’s best to weigh both the pros and cons and evaluate hard money lenders before you call the shots.