Hard money loans are loans made by private lenders based on the equity of real estate owned by borrowers. Most hard money loans are made for short periods, typically one or two weeks. Interest rates are usually high compared to conventional loans because of the additional risk to the lender. Hard money lenders are large financial institutions that do not have bankruptcy records and are therefore highly regarded by borrowers. The popularity of hard money loans is based on many factors, including the positive incentives offered by lenders, the potential to make a large profit with little collateral, and the quick turnaround time for repayment.
Why go for the loan?
One of the main reasons borrowers choose to take out hard money loans is to improve their financial position. By securing additional capital, borrowers can increase their capacity to borrow and potentially reduce monthly debt obligations. Investors are often willing to provide a higher interest rate because the potential reward is based on the lender’s future performance of the underlying collateral. For example, if the borrower cannot sell the property at the end of the term, the lender is protected from any losses associated with the property.
Easy repayment options
Another advantage of hard money loans is that they provide the opportunity for quicker repayment. Traditional mortgages typically take several months to make their interest rate calculated, and often borrowers have to wait for several weeks to find out their payment amount. Because the lender sets the interest rate and the repayment period, there is no opportunity for immediate repayment.
Unlike conventional mortgages, borrowers can sell the property to repay their loan if things do not go as planned. However, many lenders require a substantial upfront payment from the borrower. This process is known as foreclosure. In some states, borrowers may be required to pay the property taxes before repaying the lender. With hard money loans, there is usually no need to worry about the repayment process.
Types of hard money loans
There are two types of hard money loans – one is a private hard money loan, and the other is a commercial hard money loan. Private hard money loans are typically made to businesses. On the other hand, commercial hard loans are made to companies. The main difference between these two loans is the structure of the agreement. With a commercial bridge loan, for example, the funding company pays the closing costs.
When hard money loans are used to finance business ventures, there are a few things borrowers should be aware of. Investors in this financing strategy are more likely to ask for personal or business information than traditional loan terms. Hard money lenders often use personal credit history information to help determine creditworthiness. In turn, borrowers looking to obtain traditional loan terms should be prepared to disclose their business and personal financial information to the lenders during the underwriting process. It is also a good idea to prepare a personal financial statement, which will provide information about the borrower’s income and expenses.