What is a Hard Money Loan?
Most loans come from banks and credit unions. While not always the case, hard money loans generally come from private investors. These investors are financially savvy and have the extra money to lend. They look at privately lending money as a business prospect. If you pay off the loan, they receive the interest from the loan. If you don’t pay off the loan, they receive whatever collateral was offered to secure the loan. Either way, the lender wins.Who Can Apply for a Hard Money Loan?
Essentially, anyone can apply for a hard money loan. This, however, does not mean that everyone will be approved. Generally, most individuals who apply for a hard money loan cannot receive a loan through any other type of lender.Individuals with bad credit who want to make a large purchase, like buying a home, may request a hard money loan. This allows the buyer to purchase a home that they might not have otherwise been able to buy. However, hard money lenders often have a cap on the amount of money they are willing to lend, so housing options are likely to be somewhat limited.
Individuals who have difficult to verify income may also be prime candidates for hard money loans. This can include new business owners that don’t have any current assets, individuals that are self-employed, or individuals that work on a cash basis. Conventional lenders generally want a verifiable income source before handing over any type of funds. Private hard money lenders aren’t generally as strict about income verification guidelines.
Another group of individuals that might attempt to receive a hard money loan are those that are facing a foreclosure. While conventional lenders may help refinance after the owner is 30 days late, they generally tend to steer clear of individuals that are past the 30 day mark because of the level of risk. Hard money lenders are often willing to lend to these families and individuals, despite the fact that they are getting ready to lose their home.
Benefits to Hard Money Lending
The main benefit to obtaining a hard money loan is that you may be able to get a loan in a situation that seems too risky for a conventional lender. Whether it is bad credit, a foreclosure, or another type of risk, hard money lenders specialize in lending to the difficult borrower.An additional benefit, however, is that a hard money lender rarely questions how you spend the money. This can be especially beneficial if you are facing foreclosure and, instead of paying off your current home which you may owe more on than it is worth, you can sell and buy a lower costing home. This allows you to reap a benefit on both ends of the deal. Not only do you avoid foreclosure, you save money in the long run because you have lowered your monthly house payments.
Disadvantages to Hard Money Lending
It is important that you realize that there are disadvantages to hard money lending. By failing to do so, you may end up in a financial situation that is extremely difficult or unfavorable. This is mostly because hard money lenders charge a much higher interest rate than conventional lenders. This is, after all, how they make their money.For this reason, hard money lenders should only be a temporary fix to a devastating situation. There should be no other options available. You should also pay the loan off as soon as possible to avoid continuing to pay extremely high interest rates.
If, for instance, you take out a hard money loan to pay off part of your foreclosure so that you don’t lose out completely, you may consider selling the home. Once it is paid for, purchase a lower costing home so that you can pay a big portion of the hard money loan off. This will save you tremendously over the term of the loan.
