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A hard money loan is a facility that is guaranteed by real property. These loan products are considered last recourse loans. These loans are used in real estate deals, with the lender being companies or individuals and not banks.
Hard money credits have terms depending majorly on the value of the collateral. Since conventional lenders, like banks, do not advance hard money loans, lenders are generally private companies or individuals that see opportunity in this risky venture.
Property flippers may seek hard money loans to renovate and resell the property used as collateral for the financing.
The cost of hard money loans is usually higher than loans available through government facilities or banks on account of the higher risk taken by lenders offering the financing
Hard money loans are a good option for;
- Short-term financing
- Turnaround situations and
- Borrowers with a substantial worth in their property but poor credit.
Advantages and disadvantages of Hard Money Loan
There are advantages and disadvantages of hard money loans related to;
- Loan to value ratio
- The approval process, and
- The interest rates
- The hard money loans application and approval process is faster than applying for bank loans or a mortgage.
- Hard money lenders take less time going through loan application forms since there is no income verification and review of financial documents.
- Hard loan investors aren’t concerned with receiving repayment because there may be an even greater value and opportunity for them to resell the property themselves if the borrower reneges.
- Since the property is the only collateral against default. Hard money loans usually have lower LTV ratios than conventional loans.
- The interest rates for hard money loans are usually higher than in traditional loans
- Hard money lenders rarely advance finances to owner-occupied residences due to compliance rules and regulatory oversight.