Hard money, have you ever thought about where this term came from? What would it mean? Why is the word “Hard” used with money? Maybe not! The term hard money historically refers to a currency that is backed up by a solid asset or commodity, which can be in the form of precious metals or gold.
Hard money loans are the funds borrowed from hard money lenders for a short term. These loans are generally used by real estate investors but also prove to be a good tool for borrowers who have assets and poor credit.
As you can also get an idea of the name, hard money lenders are usually more worried about the actual value of a property than the creditworthiness of an individual borrower who is opting for the loan. In this article, you will learn about these lenders and loans.
Understanding hard money lenders
Hard money loans are also known as bridge loans, which are short-term loans basically used by investors like house flippers or developers who are involved with the renovation of the property for selling purposes. These loans are provided by hard money lenders who are also a solution at the times you come across foreclosure.
These loans are generally funded by investor groups or private lenders instead of banks and use real property or equity as collateral.
Working of hard money lenders
Hard money lenders secure their funding from the property they are tied to rather than that of the borrower’s financial profile and credits. This loan is usually based on the value of the property and has a short repayment term, generally less than a year.
This is the reason they are often preferred by the ones who want to buy a house, renovate it, and sell it immediately. This is an opportunity for hard money lenders, who can get repaid within a short time.
There are hard money loans, which are structured as interest-only loans, followed by a huge payment. This is what makes it simpler than any other loan type.
Expectations from hard money lenders
Hard money lenders work in a different way than traditional loan lenders. There are a few points that you should consider while thinking of working with a hard money lender:
Similar to payday lenders
Just like payday lenders who offer personal loans, hard money lenders also have a little regulation which they adhere to.
Higher interest rates
Hard money loans come with a great risk for lenders, which makes a high interest rate for borrowers to pay. Lenders can also change according to what they want based on the risk they take while making a loan.
Shorter loan terms
Hard money loans have a duration of a few months to a few years.
Different rules
Hard money lenders have the option of defining their own requirements, such as credit scores and debt-to-income ratios.
Who should opt for hard money
There are three different types of borrowers who tend to get a hard money loan, which include:
Property flippers
People who buy a property for renovation and resell it for a profit are called flippers. They reach out to hard money lenders because they need the funds on an immediate basis. This is beneficial for them when they want to bid for a property and will have an advantage over those who may need a month.
Not-qualifying borrowers
Many borrowers face challenges qualifying for traditional loans, such as a 30-year fixed-rate mortgage from a bank. Factors like a recent divorce that impacts their credit score or difficulty documenting their income can be significant hurdles. This is particularly true for business owners, who often need help to provide sufficient proof of income.
Equity-rich homeowners facing foreclosure
This is not a usual scenario; there are some homeowners who have multiple equity at home but are at risk of foreclosure. Hard money lenders consider lending in a situation where they are assured if the loan goes into debt, they will be selling the property and earn profit from that sale.
Conclusion
Hard money loans are a flexible, short-term financing solution for borrowers who might not qualify for traditional loans. These loans benefit property flippers, individuals with poor credit or unconventional income documentation, and equity-rich homeowners facing foreclosure.
By focusing on the value of the collateral rather than the borrower’s credit profile, hard money lenders provide quick access to funds. However, borrowers must weigh the benefits against the high interest rate, shorter loan terms, and unique terms set by lenders. When used wisely and for the right purposes, hard money loans can be a strategic tool.
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