Borrowing money from other people has been a common practice done by people for various purposes. In these modern days, borrowing is also a regular thing especially for business purposes and for personal needs as well. When it comes to loans, some of the common sources of borrowed funds are banks, commercial institutions, mortgage companies, and private entities. Private lenders or hard money lenders have become significantly popular these days both positively and negatively.
Understanding Hard Money Loans
Hard money loans are alternative loans usually chosen by borrowers when they are not qualified for standard loans offered by financing institutions like banks. Some also prefer hard money loans if the terms of the loan fit their needs compared to regular loans offered by banks and institutionalized lending companies. Payment terms and conditions are usually higher for hard money loans because these kinds of transactions are considered high-risk compared to standard loans.
Hard money lenders approve loans based on the value of the property or real assets of the borrower without giving large weight to the borrower’s creditworthiness. This lending practice increases the risk on the lender’s part and that is why they impose higher terms to ensure recovery of the money they lent. If you have good asset and you think your financial need is temporary, getting a hard money loan is a good option especially if you need the funds fast.
However, if your financial need is long-term, going for the hard money loan may not be a good option because of higher and riskier loan terms. Hard money loans are great for short-term financing only based on the quick-sale property value.
Why Do Private Lenders Impose Higher Interest Rates?
Hard money lenders impose higher interest rates because of the higher risk-factor of lending money to a borrower with not-so-good credit record and history. Since most of the borrowers that are opting for hard money loan are those who did not qualify from standard loans, private lenders tend to increase the interest rate to lessen the risk on their part.
The more unsecured the financial condition of the borrower, the higher the interest rate and other terms of the loan can be. However, these terms can also be properly negotiated with the private lender especially if they have good and long business relationship.
Benefits and Drawbacks Of Hard Money Loans
Applying loan from hard money lenders definitely has a lot of perks making it a good option for some borrowers especially for real estate investments and projects. Here are some of the great advantages of hard money loans.
- Speed: Almost everything about hard money loan is fast. The application and processing are fast and easy. Approval is also fast wherein some private lenders can even approve loans within 24 hours. The duration is also quite short thus the short-term loan. Compared to traditional bank loans with 10 years up to 30 years duration, hard money loans can only range from few months to 5 years maximum.
- Wider Collateral Options: Hard money lenders are usually willing to accept different types of collateral as long as borrowers can present good and profitable collateral that can properly secure the loan. Some private lenders can even accept future cash flow of the involved property to secure the loan if they can see great potential from the property. If the property is not enough to secure the loan, they can also accept other assets such us your home or retirement savings. However, make sure that you are going to finish the deal and make profits from the property to avoid losing some of your assets.
- Flexibility: Private loans, although come with higher interest rates, may also come with more flexible terms since private lenders are not restricted with the stringent rules and standards followed by institutionalized lending resources such as banks and government institutions.
- Less Credit Requirement: Some hard money lenders may still require a decent credit score and record from borrowers but most would still approve loans even if the borrowers have poor credit scores when they see great potential from the property. Compared to the requirements for standard loans, creditworthiness is basically not that a big issue for these kinds of transactions especially if the lender and borrower have good business relationship and history.
- Easy Access: Despite the availability of many banks and institutionalized lending companies, most people find private lenders as more accessible compared to these standard loan providers. Private lenders are actually available in almost all states and cities, and they are ready and quick to provide financial assistance if they can also profit from the investment or project.
- Hard Money Lenders Better Understand the Business: Private lenders definitely operate in order to earn profits. If you can find good private lenders, you would see that they are willing to provide funds for real estate projects even if the borrower’s creditworthiness is not that good because they can also profit if they help the borrower become successful with the project. Good private lenders do not want to take advantage of the borrower’s financial situation but because both parties can benefit from the project if they help the real estate investors.
- Higher Cost: The major downside of hard money loans is that interest rates and upfront fees such as origination fees and points are higher than average compared to those imposed by banks. The higher terms increase the risk on the borrower’s part. Proper management of investments are crucial in order to avoid default and losing of properties and assets due to failed transactions.
- Short-Term Duration Only: Private loans are also commonly termed as short-term loans basically because the duration of the loans is shorter ranging from months to 5 years only. This can be an advantage for some but shorter loan duration would mean higher monthly payment to fully repay the borrowed amount plus with the high interest rates, hard money loans can be a big monthly burden if you cannot manage your finances well.
- Profitable Properties Only: Although hard money lenders are not that strict when it comes to credit scores and ratings, they can somehow be quite strict when it comes to properties involved. They can be really meticulous and will only approve loans for properties and assets that will surely provide profits since they do not want to get stuck managing properties if borrowers default from the loan. If the property involved is indeed lucrative, borrower can profit and finish the deal, and repay the loan. Both parties will benefit and earn from the deal, a win-win situation.
Getting Your Loan Application Approved By Your Hard Money Lender
Finding a good loan with reasonable terms is very crucial for the success of your project or to successfully get out from a financial trouble. If you think that hard money loan is the best way to fund your needs, then you should first study and understand the processes, requirements, and techniques needed to have your loan application approved by hard money lenders.
The most important thing to get your loan accepted is to find a potential project or property with great future profits. If you are borrowing money because of financial problem and short-term loan is what you want, then make sure that you have valuable real assets that can be presented as collateral for the loan.
Next is to prepare your repayment and exit strategy. Private lenders would be more willing to lend money if you are able to present a good exit strategy by either refinancing or reselling the property before the end of your loan, or by presenting a good repayment plan.
It would also be an advantage if you prepare the necessary documents needed when applying for a loan so you can easily present them once you found a good hard money lender. Although hard money loan is based on property and real assets, you should still prepare financial information such as your credit record, assets, and income. If you have good records, then it would be more advantageous on your part since aside from having a lucrative property as collateral, you can also show that you have good creditworthiness. However, if you have poor credit record, prepare the documents still so you can readily present them if the hard money lenders request those documents.
Extensive research is definitely important especially regarding the property involved. Real estate investors who have years of experience in the business can easily find properties that have great potential making it easier for them to look for funds like hard money. However, if you are new to the business, make sure that sales, repair, and other important details about the property are prepared.
To have greater chances of getting your loan approved, you should also consider raising your trustworthiness. If you have cash on hand, present them, as well as cross collateral to add value and security to the deal you are offering.
And lastly, know the risks and terms. Hard money lenders will be more willing to lend funds for your investment project if you show them that you know and understand the risk involved, and trusts that your project will profit well in the future ensuring a full repayment of the loan.