How Hard Money Loans Can Benefit You
The advantages of hard money loans
It offers immense benefits that are not normally available through large banks or credit institutions. Some of the benefits include:
- Minimum conditions: To qualify, a borrower must meet a short list of criteria, while a bank has many fixed conditions that must be met. This may include income history, credit report, etc. The entire process can be drawn out and ultimately the borrower may not even be approved in the end. On the contrary, these loans are quite simple and straightforward. If the hard money lender assesses the borrower’s target real estate investment as excellent value and the borrower has at least 20% equity to invest in the deal, the investor is likely to qualify.
- Fast 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 the requested documents are submitted in a timely manner. The main reason hard money lenders can approve loans quickly is the short list of required documents and the smaller size of the lender’s organization that doesn’t have to deal with the corporate bureaucracy that banks do.
- Credit lenient: You’ll also be more lenient 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 a bank’s strict “credit box,” the chances of qualifying for the loan are significantly reduced. For hard money lenders, credit history doesn’t matter as much as the value of the borrower’s assets and equity, or “skin in the game.” As long as you both meet the lender’s expectations, you have a good chance of getting the loan.
- No prepayment penalties: Another important benefit is the absence of prepayment penalties. If you take out a loan from a large financial institution, you will most likely receive 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’s not hard to find a hard money lender that’s willing to lend you money with no prepayment penalties included in 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:
- High interest rates. Since the lender takes on additional risk by lending on property that is not bank financeable 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.
- Short term loan. If you are looking for long-term financing, you may find it difficult to obtain a hard 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 close to your location then it can be much easier to apply as you will find many lenders willing to offer them. However, before you rush out and apply to all available lenders, keep in mind that you should spend some time researching them to find the best lender.