The advantages of hard money loans
It offers huge benefits that are not normally available through large banks or credit institutions. Some of the benefits include:
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Minimum conditions: To obtain, a borrower must meet a short list of criteria, while a bank has many hard-and-fast conditions that must be met. This can include income history, credit report, etc. The whole process can take a long time, and ultimately the borrower may not even be approved. On the contrary, these loans are quite simple and straightforward. If the hard money lender assesses a borrower’s target real estate investment to be excellent value and the borrower has at least 20% equity to put into the deal, the investor will likely qualify.
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Quick Loan Approvals – You can get approved much faster than traditional banks or financial institutions, which can take at least 3-4 weeks. In many cases, a borrower can receive approval and financing within a week, especially if requested documents are submitted in a timely manner. The main reason that hard money lenders can approve loans quickly is the short list of required documents and the smaller size of the lender’s organization, which does not have to deal with the corporate bureaucracy that banks do.
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Forbearance on credit history: You will also be more forgiving on your credit history. If you apply for loans from major financial institutions, one of the main factors they will check is your credit. If a borrower does not fit into the strict “credit box” of a bank, the chances of qualifying for the loan are significantly reduced. For hard money lenders, credit history doesn’t matter as much as the borrower’s asset and equity value, or “skin in the game.” As long as you both meet the lender’s expectations, you have a good chance of getting the loan.
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No prepayment penalties: Another important benefit is the absence of prepayment penalties. If you borrow from a large financial institution, you will most likely be assessed a prepayment penalty if you pay off the loan before the due date. You can avoid these fees by opting for hard money loans. It is not difficult to find a hard money lender who is willing to lend you money with no prepayment penalties listed on the term sheet.
Although hard money loans offer the advantages mentioned above, they are not completely without drawbacks. Some of the disadvantages of hard money loans include:
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Higher interest rates. Since the lender takes additional risk by lending on property that is not bankable and on a borrower who would not qualify for a bank loan, a higher interest rate is usually at stake. This is an important factor to consider when deciding whether or not to opt for a hard money loan.
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Short-term loan. If you are looking for long-term financing, you may find it difficult to obtain a big money loan. A conventional bank may be a better option if you need financing for more than 12 to 18 months.
If your real estate investment is in your close location, then it can be much easier to apply, as you will find many lenders willing to offer them. However, before you jump into the gun and apply for all the available lenders, keep in mind that you should spend some time researching them to find the best lender.
