The Pros and Cons of Hard Money Loans

Hard money loans are best described as short-term loans used primarily in real estate. They are usually funded by private fund investors and not by conventional lenders like credit unions and banking institutions.

And because they are classified as short-term loans, the term is typically only around 12 months or up to 2 to 5 years depending on what the lender offers or what is stipulated within the agreement.

The loan usually requires regular monthly payments of “interest only” and a balloon payment towards the end of the term.

Credit history is important
Borrowers with complicated credit history can still be re-considered for hard money loans due to the flexibility of the terms and rates.

Important Key Points about Hard Money Loans and Hard Money Lenders

  • Home buyers and property investors who find 30-Year Fixed-Rate mortgages as long-term obligations or hassle can consider hard money loans as an option. This particularly makes more sense among those who are flipping houses for a profit.
  • The amount that hard money lenders are able to provide to the borrower is mainly based upon the market value of the subject property. It could be a property that the borrower already owns and wants to use as collateral or it could also be a property that the borrower wishes to acquire.
  • Hard money lenders are more concerned about the property’s market value rather than the borrower’s credit score. However, it doesn’t necessarily imply that credit history is of less importance in this case. Hard money lenders are simply more flexible and practice a different set of guidelines compared to conventional lenders.
  • Borrowers and home buyers who are unable to get conventional financing due to bad credit score, short sale or a recent foreclosure can still apply for a hard money loan if they have enough equity on the property that is being presented as collateral.
  • Even when a bank rejects a mortgage loan application, there is still a chance that hard money lenders can reconsider.

Who Can Benefit from Hard Money Loans?

Real estate investors who don’t want to miss an opportunity to buy a property can rely on hard money lenders for quick funding.

Real estate investors can benefit from hard money loans for several reasons. The major reason is the capacity of hard money lenders to provide the funding quickly.

In most cases, the loan amount can be issued in as short as one week in comparison to the 30 to 45 days that it takes for a bank to review and approve a mortgage loan.

Moreover, the process of application for hard money loan usually takes only 1 to 2 days. More competitive lenders can even assess and approve a loan within the same day that it has been filed.

Hard Money Loans are primarily used for the following situations;

  • Fix and Flips
  • Property Construction Loans
  • Land Loans
  • Home buyers with complicated credit history
  • When a buyer has bad credit score
  • When a real estate investor needs immediate funding