Hard money loans carry interest rates even higher than traditional subprime loans. This is the main reason why banks and other traditional lenders do not provide hard money loans. Instead, you can get this type of loan from private individuals and specialized companies. Hard money loans are very expensive and should be used only in emergencies, turnaround situations, short-term financing. Also, borrowers with poor credit but substantial equity in their property can access this type of loan.
Hard money lenders are more interested in the collateral securing the loan, rather than your ability to repay. If anything goes wrong and you can’t repay the loan, hard money lenders plan to get their money back by taking the collateral and selling it. The value of the collateral is more important than your financial strength.
Hard money loans are short-term loans, with an availability ranging from one to five years. It is not recommended to access them for more than that, because interest rates for hard money loans are generally higher than traditional loans.
Even though getting hard money loans seems a pretty risky maneuver, its advantages should not be neglected. If you cannot get sufficient funds from a traditional loaner and you have sufficient collateral to guarantee for the loan, then a hard money loan would be useful. The main advantages are:
1. They are processed very fast. Since the lender will focus mainly on the value of the collateral, rather than the borrower’s financial creditworthiness, a hard money loan can be closed faster than any form of traditional loan. If they agree that the value of the property covers the loan, should you not be able to pay, then you are good to go. This saves them a lot of time, since they will not perform many searches through your credit history and income.
2. A high flexibility degree. Lenders who provide this form of loan do not use standard underwriting procedures. They usually analyze the client face to face. Depending on your negotiation skills and financial situations, you may be able to slightly modify some terms in your favor. That’s the advantage of talking with a person willing to cooperate, rather than talking with a strict corporation.
Since the most important factor in a HML is the collateral, the lender will be interested how the money will be used. For example, if you want to invest in a property, the lender will ask about its value.
HML lenders keep loan-to-value ratios low. Their maximum LTV ratio might be 50% to 70%. This means that you need some assets to qualify for hard money. Because the ratios are low, lenders ensure that they can sell your assets really quick if you do not pay and recover their money back.
Hard money loans make sense for short term. Contact our mortgage brokers to find out more about hard money loans.