Many a homeowner or business owner have found themselves in a difficult financial situation with limited options. Part of being in difficult financial situation is having issues with one’s creditworthiness. That translates to not being able to borrow money from a bank or credit union even with good collateral. So where does someone go for money in an emergency?
The finance world is filled with private investors (companies) that are willing to take on certain amounts of loan risk if the potential rewards are big enough. These types of private investors are called hard money lenders. Rather than worry about a borrower’s creditworthiness, they make lending decisions strictly based on collateral equity.
Who Might Want to Consider a Hard Money Loan
The decision to seek funding from a hard money lender should not be taken lightly. However, it’s a viable alternative when the borrower finds themselves in certain situations. The biggest reason some people are willing to take on a hard money loan is because they need cash but can’t qualify for a conventional loan from a regular bank or lending institution.
That’s not the only circumstances in which a hard money loan could be useful. If someone is looking to buy a home and immediately flip it for a profit, financing the original purchase with a hard money loan might make sense. As long as there’s plenty of equity in the property, the loan can be secured within days, which works out well for a property investor who doesn’t have time to deal with bank bureaucracy. When a homeowner is facing foreclosure, the hard money loan often becomes the last line of defense, again, as long as there’s plenty of equity in the property.
Bottom line, a hard money loan is a viable alternative when the borrower is facing difficult circumstances and needs help.
The Benefits of a Hard Money Loan
After reading below about the negative aspects of taking on a hard money loan, it would be reasonable for someone to question why anyone would even consider such a loan. With that said, hard money loans do come with a couple of nice benefits. First, hard money lenders don’t typically require financial disclosures or credit checks. They’re going to make their lending decisions based on collateral equity. The second real benefit is the speed at which a loan can be secured and funded. Usually, hard money lenders can fund a loan within one day of getting an appraisal on the collateral.
The Negatives of a Hard Money Loan
The negatives related to a hard money loan make it clear this is a borrowing alternative to be considered only under adverse circumstance. Why? To begin with, the borrower is going to have to come up with a down payment large enough to create as much as 30% to 40% equity in the collateral. It’s the only way the lender can mediate risk. Not only will there be a down payment requirement, but the lender is most likely going to charge exorbitant loan processing fees, as much as 3% of the loan value.
Other negatives include the possibility of the borrower taking on an interest rate that’s as much as double the rate being charged on conventional loans. Also, hard money loans are not intended as anything other than bridge loans. The loan terms will usually only extend out two to five years.
A hard money loan is far from being the perfect borrowing solution. However, it’s a viable alternative for borrowers who are facing difficult a credit situation with nothing more than asset equity to offer as security for a loan