Hard money loans are short-term lending tools that real estate investors can make use of to finance an investment project that they are working on. Loans of such kind are tools for house flippers or and real estate developers because we are well familiar that their job or business is to either renovate a property or build a property. Private lenders issue hard money loans, so one has to go to private money lenders instead of financing institutions such as banks.
Bank loans are given on the creditworthiness of the customer but hard loan lenders work differently than banks. They are more into the value of the property and then decide either to give a loan or not to the investor.
Hard money lenders
Hard money lenders are those private loan providers and companies that only deal in lending money. So real estate investors that need urgent money to buy a property usually went to hard money lenders to get money as soon as possible.
Everything has advantages and disadvantages. So we can’t exempt hard money loans from this category.
Drawbacks of HML
Hard money loans aren’t a pure and excellent financing solution. There are two basic drawbacks one must know.
Cost: It’s genuine to say that hard money loans are convenient, but nothing comes free in this world one has to pay the price in the same way investors pay a price to get a loan in this way. The rate of HML is 10 percentage points higher than for a loan. Origination fees, loan-servicing fees, and other things like closing costs, etc. used to cost way more to the investors.
Shorter repayment time: The main purpose of an HML is to enable an investor to make the property ready to go on the market as soon as possible. Because of that, these loans offer limited and shorter repayment terms as compared to other traditional loans. So one must have a clear picture of how early the property becomes profitable and benefits him, to repay the loans in time.
Benefits of HTML
There are several good reasons one must look into for getting a hard money loan instead of money from a bank. Here are the main benefits lenders offer to investors.
Convenience: As we all know that applying for a bank loan is a time-consuming procedure. It can take months to get a loan from a bank, putting investors at high risk of losing profitable investment property. But with a hard money loan, it’s possible to get money within weeks. That’s important because sometimes one can’t afford deviations from timeline to completion.
Flexible terms: As hard money loans are provided by private lenders, it’s easy and accessible for investors to negotiate the loan terms. They might be able to alter the repayment period to their needs. In addition to that, they may get a discount on origination fees.
Hard money loans are not the same as bank loans
The basic difference between a hard money loan and a traditional bank loan is the lender. Hard money loans are always provided by a private lender that can be an individual or a private lending firm.
Hard money lenders can ask for higher interest rates and fees structure. They can get away with terms and conditions that wouldn’t be allowed with traditional bank loans.
Hard money loans are an excellent fit for wealthy investors who need to get funding for an investment property in a short time. But one must have to ensure to get good agreement terms to avoid high-cost value.