The pros and cons of hard money loans
Hard money loans are an alternative form of getting money that many people are unaware of. When you need a loan urgently and your bank or credit union rejects you because of your poor credit or other reasons, money lenders can lend you the required amount for 10 years (or more depending on the circumstances). They look at your assets and not your credit; therefore hard money lenders may be an alternative to consider. Here are some pros and cons of hard money loans
Benefits of Hard Money Loans
1. Fast Process – Banks take at least 60 days to complete the process. The typical hard money lender will issue the loan to you within 1-2 days. Local lenders who know you can even give you the funds the same day. This works especially well for you if you need cash for quick purchases, for emergency needs, or for other situations such as when you want to continue construction in order to sell your property. It also helps you impress the buyer when you want to jump in front of an auction queue to land a certain property.
2. Less paperwork – Banks and traditional lending institutions tend to put you through a grueling underwriting process that involves signing long and complex forms and then waiting at least a month to see if you’ve been approved. Hard money lenders give it up. Each has its own system, and each deals with borrowers individually. Borrowers therefore tend to sign only a few forms. Lenders will ask you a few questions and may review your credit history. The 2010 Dodd-Frank Act states that lenders must ensure that borrowers can pay; that they are not charged sky-high interest rates; and that they are not charged more than two prepayments (depending on the circumstances). Lenders evaluate each application differently and reach their conclusions based on the value of your property rather than your credit. So even if you have bad credit, you may be able to get a hard money loan. The lender focuses more on the value of your property than on your credit.
3. Flexible terms – Banks can require regular payments. The lender is lenient with you and often offers you flexible loan repayment terms. (Again, this depends on the specific lender). So, if times are tough, you can get by by just paying interest each month or just paying the lump sum repayment at the end. This makes it easier for you in the long run instead of forcing you to make a hefty payment each month.
Disadvantages of hard money loans
1. High Interest – hard money lenders charge triple the amount of banks – and sometimes even more than that. Lenders can sometimes be finicky with their interest amounts, so it’s important to shop around. Some lenders may offer relatively reasonable rates, but we suggest negotiating as lenders know they are your last resort and may charge accordingly. Some of the state usury laws, such as those in Tennessee and New Jersey, prohibit hard money lenders from charging excessive interest. Residential borrowers have additional protection under consumer regulations and the Dodd-Frank Act. If you are a commercial borrower, you need to be more careful as the loan terms are more aggressive and you get less protection.
2. Low loan-to-value ratios – The loan-to-value ratio is how lenders determine how much money you’re going to get. For example, with a loan-to-value ratio of 70%, the lender will give you $70,000 for a $100,000 property. Lenders usually only give 60% or 50% of your required amount, which means you’ll have to dig up the rest elsewhere.
3. Difficult to locate – An honest and efficient lender can be difficult to locate. You can find hordes of lenders online, but each lends to only one or more states and is certified to lend to the states they deal with. You may have few or no lenders that you prefer (or who will handle your type of loan) in your area and you may have to travel to get the services you want. Either way, make sure the lender is licensed by the National Mortgage Licensing System (NMLS) and its regulatory agency.
Hard money loans can be wonderful for you when you need it in a critical moment and cannot get the money from anywhere else. They have relaxed approval standards, are quick to obtain, and involve little paperwork. On the other hand, they have a low loan-to-value ratio and a high interest rate. If you have good credit, you may prefer the traditional loan. Only consider hard money if you have an urgent short-term need with few or no alternatives.