These Are the Pros and Cons of Hard Money Loans
First thing to know about hard money loans is that hard money lenders do not focus on the borrower’s credit history and income. Hard money lenders focus on the property value. The security for the lender is completely in the property. While they will look at a professional appraisal, it’s not the only valuation tool that hard money lenders generally rely on because these are geared towards bank loans.
Hard money loans are great for house flipping or real estate developers who are looking to renovate or develop property before selling it for a profit. Hard money loans are perfect for those who need money fast because it can take weeks for individuals to be approved for a loan while you can get a hard money loan in a matter of days.
According to Realty Biz News, hard money lenders “want at least two and possibly three valuation models to make an educated decision from. Hard money lenders will look over the tax assessment records but again this isn’t a reliable way of valuing real estate. Tax assessment districts calculate values on an annual basis at best and many only every other year. Also, the taxman only values property from the curbside. They don’t have access to the inside of the house.”
Hard money loans aren’t free money. You should know the drawbacks beforehand:
- Cost: Hard money loans are extremely convenient, that what makes them so popular. However, the rate can be up to 10 percentage points higher than for a conventional loan. Origination fees, loan-servicing fees and closing costs are also likely to cost investors more.
- Short repayment period: The reason why house flippers and property developers use hard money loans is because it allows the investor to get the property ready to be listed on the market as soon as possible. That being said, hard money loans feature shorter repayment periods. It’s very important to know how soon the property will produce a profit in order to ensure timely repayment.
Of course, there are plenty of benefits to that hard money loans offer:
- Convenience: Because of the new regulations on mortgage lending, applying for a mortgage takes month which makes it difficult for investors to jump on profitable investments. Hard money loans are fast and time is everything if you’re funding a large development project.
- Flexibility– Since hard money loans are offered by private lenders, you can negotiate the terms in order for you to get the loan that works best for your interest. Banks are not nearly as flexible in their terms.
- Collateral – The property itself serves as collateral for the loan in the case of hard money loans. However, you can still find that some lenders are flexible in that respect. Some lenders may allow you to secure the loan using your own assets, such as a retirement account or a residential property you own.