Hard money loans are an alternative way to get money that many people are unaware of. When you need a loan in a hurry and your bank or credit union rejects it due to low credit or other reasons, hard money lenders can lend you the required amount for up to 10 years (or more 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. Quick process: banks take at least 60 days to complete the process. The typical hard money lender will deliver the loan to you in 1-2 days. Local lenders who know you can even deliver the funds to you that 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 ahead of a bidding queue for a certain property.
2. Less paperwork – Traditional banks and lending institutions tend to guide you through a grueling underwriting process that involves signing long and 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 a few questions and may look into your credit history. The Dodd-Frank Act of 2010 states that lenders must ensure that 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 make 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 big 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 offers flexible loan repayment terms. (Again, this depends on the specific lender.) So if times are tough, you can get by by paying just interest each month or paying just the balloon refund at the end. This makes it easier for you in the long run rather than making you make a hefty payment every month.
Disadvantages of hard money loans
1. High interest: Real money lenders charge triple the amount of banks and sometimes even more than that. Lenders can sometimes be fickle about their 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 of the states’ usury laws, such as Tennessee and New Jersey, prohibit hard money lenders from invoking excessive interest. Residential borrowers can avail themselves of greater protection under 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 ratios: The loan-to-value ratio is how lenders determine how much money you will receive. For example, with a loan-to-value ratio of 70%, the lender will give you $ 70,000 for a $ 100,000 property. Lenders generally give only 60% or 50% of the required amount, which means you will have to dig up the rest from elsewhere.
3. Difficult to locate: An honest and efficient lender can be difficult to locate. You can find hordes of lenders online, but each one only lends to one or more states and is certified to lend to the states it deals with. You may have few or none of the lenders you prefer (or who will service your type of loan) in your region, and you may need 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 in a crisis and can’t get the money from 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 the traditional loan. Consider hard money only if you have an urgent short-term need with little or no alternatives.