If the term ‘hard money loan’ gives you the image of quick and easy business transactions where you get “cold, hard cash,” you’re not really quite far off the mark. But just because hard money loans offer fast financing doesn’t necessarily make them a safe option for everyone.
There are things about it that you should be wary of. What are these? The experts at Hard Money Loans Connecticut will help provide us with a thorough explanation of this loan type and the things you need to watch out for. Read on to find out more.
First things first, what is a Hard Money Loan?
A hard money loan is defined as a short-term, non-conforming loan that is not sourced from traditional lenders (such as banks), but from individuals and/or private companies that require property or an asset as collateral.
People usually turn to hard money loans as a last resort, after their loan or mortgage application is denied. Some people simply prefer it to avoid the long and tedious process that comes with getting loan approval through traditional means.
A hard money loan, like traditional loans or mortgages, is a secured loan that uses the property it is being used to purchase as collateral. When you say hard money loan, the ‘hard’ part refers to the physical or tangible asset used to back the loan’s value.
When a person is unable to pay a hard money loan, the lender can assume ownership of the asset to regain its losses.
Unlike traditional secured loans or mortgages, hard money loans usually have fast and less strict approval processes, which is why they are a sought-after solution for those who need to purchase property right away.
When applying for a mortgage, it often takes a month or more (from application to close) till you are able to purchase a property. With a hard money loan, you’ll be able to close it in just a couple of days.
What to Know about Hard Money Lender
The kind of people that usually engage with hard money lending is private investors or companies, such as Hard Money Loans. You can try and search, but you will never find hard money loan options at your local bank or any bank for that matter.
Hard money lenders aren’t subject to the same laws and regulations that traditional lenders follow. This simply means that they are, mostly, free to decide on rules concerning credit scores, or debt-to-income ratios their borrowers must-have.
You can find hard money lenders that will approve your loan even if you were denied by banks and other traditional lenders. This is because, for money lenders, one’s credit score isn’t important—the value of the property being purchased matters more.
Hard Money Lending: How Does it Work?
The experts at Hard Money Loans Connecticut will provide us with a thorough explanation of how hard money loans compare to other traditional forms of financing below:
Traditional Loans in this context refer to loans that are acquired through standard loan applications.
This means that you apply for a loan with a lender (in this case, a bank), the lender checks your credit score and makes sure that you have the capacity to repay them and, if they see that your finances are according to their standards, only then will they approve your loan.
There are many different types of loans that fall under this category, such as auto loans, personal loans, mortgage loans, and/or home equity loans.
While it’s generally possible to apply for these types of loans from private lenders that do not have the same strict application process as traditional lenders do, private loans can be a bit more expensive and riskier.
Traditional lenders evaluate your entire financial status, including your income, credit history, current debt owed to other lenders, other assets (cash reserves included), and the size of your down payment.
These lenders usually go through a tedious and lengthy process to minimize the risk they face when they approve a loan. Once they’ve made sure that a borrower is creditworthy, the lender can offer better rates and better financing.
Hard Money Loan. When it comes to hard money loans, the lender approves a borrower not based on their credit score but on the value of the property being purchased.
However, the lender can also take a quick look at your credit score, credit record, or finances, but in general, the process is a lot less meticulous compared to that of a traditional loan.
For this reason, the application to approval process happens more quickly, so borrowers can get their money as soon as possible—sometimes in just a matter of days!
While the process is quick and easy, the downside to this is that the lender takes on a huge risk, which is why hard money loans usually come with high-interest rates. Hard money loans also have shorter repayment periods—usually just a year or two.
Traditional loans and mortgages usually come with 15 to 30-year repayment terms.
What Do You Use Hard Money Loans For?
According to Hard Money Loans Connecticut, these are some reasons why people prefer hard money loans:
To Flip Homes –it’s become a trend for real estate investors to purchase low-cost properties, increase their value by renovating them, and then flipping them for profit.
People who do this can benefit from hard money loans because their house flipping projects happen fairly quickly.
They usually prefer faster forms of financing because they plan to sell the property within a short period of time—usually under a year—so they don’t need to take on a long-term loan.
To Purchase Investment Property –those who want to invest in rental property but are unqualified for traditional financing can try hard money loans to pay for their investment.
This can be quite helpful for those who are unable to get approval for their traditional loan due to poor credit history, or for those who need more money than what a traditional lender allows them.
To Purchase Commercial Property –business owners can also seek out hard money loans to finance a purchase of the commercial real estate. Entrepreneurs can purchase property that doesn’t qualify for traditional financing using hard money loans.