Hard money loans are an alternative way of getting money that many people are unaware of. When you urgently need a loan and your bank or credit union turns you down due to poor credit or other reasons, hard money lenders can lend you the required amount for up to 10 years (or longer depending on the circumstances). They look at your assets, not your credit; therefore, hard money lenders may be an alternative to consider. Here are some advantages and disadvantages of hard money loans
Advantages of hard money loans
1. Fast Process – Banks take at least 60 days to consume the process. The typical hard money lender will deliver the loan to you within 1-2 days. Local lenders who know you can even give you the funds the same day. This works particularly well for you if you need the money for some quick purchases, for an emergency need, or for other situations, such as when you want to continue construction to sell your property. It also helps you impress the buyer when you want to jump in front of a queue of offers for a certain property.
2. Less paperwork: Banks and traditional lending institutions tend to take you through a grueling underwriting process that involves signing long, complex forms and then waiting at least a month to see if you’ve been approved. Hard money lenders give that up. Each has its own system and each deals with borrowers individually. Borrowers therefore tend to sign only a few forms. Lenders will ask you some questions and may review your credit history. The Dodd-Frank Act of 2010 states that lenders must make sure borrowers can pay; that they are not charged huge interest rates; and that no more than two prepayments are charged (depending on the circumstances). Lenders evaluate each application differently and draw their conclusions based on the value of your property rather than your credit. So even if you have bad credit, you may be able to get a hard money loan. The lender focuses more on the value of your property than on your credit.
3. Flexible terms: Banks can require regular payments. The lender is soft on you and often gives you flexible loan repayment terms. (Again, this depends on the specific lender.) So if times are tough, you can get by paying just interest each month or just paying the balloon repayment at the end. This makes it easier on you in the long run rather than making you make a hefty payment each month.
Disadvantages of hard money loans
1. High interest: Hard money lenders charge triple the amount banks charge, and sometimes even more than that. Lenders can sometimes be capricious about your interest amounts, so it’s important to shop around. Some lenders may offer comparatively reasonable rates, but we suggest you negotiate as lenders know they are your last resort and may charge accordingly. Some state usury laws, such as Tennessee and New Jersey, prohibit hard money lenders from claiming excessive interest. Residential borrowers can turn to more protection under the Consumer regulations and the Dodd-Frank Act. If you are a business borrower, you should be more careful as the loan terms are more aggressive and you receive less protection.
2. Low loan-to-value ratio: Loan-to-value ratio is how lenders determine how much money you get. For example, with a loan-to-value ratio of 70%, the lender will give you $70,000 for a $100,000 property. Lenders usually give only 60% or 50% of the required amount, which means you’ll have to find the rest elsewhere.
3. Difficult to locate: An honest and efficient lender can be difficult to locate. You can find hordes of money lenders online, but each lends only to one or multiple states and they are certified to lend to the states they deal with. You may have few or none of the lenders you prefer (or serve your type of loan) in your region, and you may have to travel to get the services you want. In all cases, make sure the lender is licensed by the National Mortgage Licensing System (NMLS) and through your state regulatory agency.
In shorts…
Hard money loans can be wonderful for you when you need them at a critical time and can’t get the money anywhere else. They have relaxed approval standards, are quick to obtain, and involve little paperwork. On the other hand, they have a low loan-to-value ratio and a high interest rate. If you have good credit, you may be better off with a traditional loan. Consider hard money only if you have a pressing short-term need with few or no alternatives.