Some hard money lenders with unscrupulous qualities have tarnished the industry’s reputation for the perceived complicated lending procedure and concealed high interest rates. Lenders operating out of dark alleyways are scaring investors away from hard money loans. Do not be scared!
Now, though, the situation has shifted. States have imposed stringent rules and licensing requirements on hard money lenders, which they must adhere to in all circumstances.
What are hard money loans?
Hard money loans are short-term loans with specific terms that private lenders or licensed companies provide. Typically, these are “asset-based” loan facilities, which means that the borrower receives the money but uses their real estate property as collateral for the loan.
Private investors, unlike conventional banks or lending companies, are the leading providers of hard money loans. It is why some financial players refer to such loans as ‘private money loans.’
While conventional lenders look at the borrower’s credit score, private lenders base the loan amount mainly on the property’s value. They focus on the LTV (loan-to-value) ratio. The loan-to-value ratio is calculated by taking the loan amount and subtracting the value of the pledged collateral.
What are the advantages of applying for a hard money loan?
Hard money loans are often misunderstood as a kind of funding for investors with a poor credit background. While this is often the case, a hard money loan may benefit you regardless of your credit score. The following are some of the advantages of obtaining a hard money loan.
Less requirements
Unlike banks and other conventional lenders, hard money lenders often need just a few qualifications. They are primarily interested in determining if the borrower has enough equity in the property, sufficient cash on hand to make monthly payments, a feasible exit plan, and, in some instances, adequate business expertise.
Banks use a borrower qualification system that flags specific issues and prohibits the application from being processed. For example, recent foreclosures, loan modifications, short sales, and bankruptcies are often included in banks’ risk assessments of lending to someone.
Additionally, banks are restricted from lending to borrowers with a poor credit history. For example, most banks will refuse to lend to an applicant who already has four mortgages, irrespective of whether the borrower has excellent credit and no bad credit history.
Acceptance of Less Than Great Credit Ratings
It’s a well-known truth that banks will not to lend to someone with a bad credit score. But, on the other hand, hard money lenders base their decisions on the profitability of the property being financed rather than credit. Therefore, even if one has a poor credit score, which would generally exclude them from a commercial bank loan, one may readily get a hard money loan.
The property serves as the collateral.
Security is the investment asset itself. This is a significant benefit of hard money property loans. The value of the property is the determining factor for hard money loans. A property evaluation is performed, and the hard money lender lends the amount indicated by the investment property’s worth. Thus, the value of the collateral is more significant than your financial condition. Consequently, unlike traditional bank loans, you don’t have to be concerned about your poor credit score.
Concluding
Speed, simplicity, convenience, and flexibility are key characteristics that have grown from buzzwords to fundamental needs in the real estate business. A hard money lender thrives in this environment. They simplify the financing process, enabling investors to focus on more critical tasks. As a result, they are remarkable not just in putting money in investors’ wallets but also in helping them achieve their goals on the fly.
Easy-to-obtain hard money loans can provide your business with the wings it needs to fly further!
