What Is a Hard Money Loan?
A hard money loan is a kind of credit facility that is safeguarded by tangible real assets. Hard money investors, creditors and lenders primarily land on the value and worth of the real estate property.
Easy Loan Documentation:
The “creditworthiness” or the documentation to prove the creditworthiness of the borrower is less important. A hard money lender will stake their investment in the real estate property and not rely as much on the borrower’s ability to pay the mortgage.
Therefore, the documentation on the borrower was required as much less and easier than any other mortgage type. Traditional banks and institutional money will require loads of paperwork documentation and letters of explanation of the borrower. Many times, income and asset documentation are not required from hard money lenders.
THE BASICS OF HARD MONEY LOANS
- Hard money loans are collateralized on the and not real property the creditworthiness of the borrower.
- Investors are more selective on the area, location, and type of property that they will invest.
- Investors will have a shoulder loan term and may ask what the exit strategy of the deal is.
- The rate and fees may vary depending on the investors current financial standing, the particular investment deal and their general gut feeling.
- If a deal goes sideways and needs to be foreclosed, the investor may move faster than a traditional bank.
How Do Hard Money Lenders Work?
Unlike the bulky institutional money and traditional banks, hard money lenders are not tied to stockholders, Market fluctuations and the Marriott of other factors are tied with big heavy corporations.
Hard money lenders and investors are very savvy and want to keep things easy for themselves. If they like a property, they are willing to invest in it. They don’t want to model the deal and not get confused by the particular borrower.
Investors are typically individuals who may either pool their money to buy into a hard money deal jointly or they may fund a deal by themselves. Each individual investor will have their own comfort areas and like particular deals. At the same time, they may also want to avoid particular types of deals. For example, an investor may only want to invest in single family residences. Others may want to avoid commercial properties.
There are many different factors to see if an individual will invest their own money. They may require a borrower to have at a certain minimum Fico score. Or they want to see the business model more strategy of the borrower’s investment deal. What is the bar going to do with the property? Are they going to fix and flip it, or buy and hold? Will they be seeking to sell it or refinance it into a permanent loan? They’ll be asking questions that any good investor will ask.
Look at Hard Money Lenders as Your Financial Partner
This is truly a win-win collaboration with the lender and the borrower. The investor lender wants the power to succeed on their deal and make a profit. In turn, the lender makes money on their loan.
And with each new successful deal, the relationship will grow stronger with more trust. With an experienced track record with the private investor, they may start to loosen the guidelines and ease on the rate and the fees for each new loan. Additionally, hard money lenders will want to work with more deals and projects with the borrower. There may be multiple projects going on at the same time once the relationship grows.
This is much different than a traditional bank or major institution where they can only abide by their guidelines with almost no exceptions to it. Hard money lenders are investment partners with the individual borrower.
Advantages of Hard Money Loans
- Fast underwriting time frames. Sellers may view hard money loans almost as good as a cash offer! This may make your competitive offer stronger than others.
- Guidelines are looser. Private investors will look at real estate properties in different conditions or particular issues that traditional banks are not allowed to look at with their strict guidelines. Things like major repair, title issues, fire damage etc. are things that traditional banks will not be able to do with their stockholders.
- Less documentation. Hard money lenders are primarily using the property as collateral. This is called asset-based lending. With regard to the borrower, they want to make sure there is some history, and no major issues on their credit or other financial dealings. In most cases income documentation is not required and just the minimum asset documentation to keep in compliance with any lending practices.
Disadvantages of Hard Money Loans
- Costs are higher than traditional bank loans. Obviously, there may be more risks associated with a hard money loan to the lender. The property may not be in an ideal sellable condition or there may be other issues as well. To take on the greater risk, investors will require a higher return on their loans. This may be reflected in the rates and the fees of the loan.
Depending on the situation and investment strategy, hard money loans are a viable option to meet the financial goals of experienced real estate investors. This is a financial partnership between the lender and the borrower. Each should recognize the pros and cons of each side. This will help until a win-win outcome and the growth of a business relationship.