Real estate investors who want to get things done can benefit from a hard money loan that both simplifies and expedites the process. Hard money lenders accept loan applications from borrowers who prefer to pay a higher rate of interest for a short period to avoid the hassle of bank loan processing.
The time delays, nearly endless paperwork and inflexible requirements make the option of institutional lending unreasonable and unnecessary for many real estate developers and investors. Hard money lenders welcome the opportunity to provide prompt access to loans for residential real estate projects that may include single or multifamily homes and for commercial or industrial projects.
Some hard money lenders may approve loans for vacant or undeveloped land. Most real estate investors want to get a loan approved as soon as possible, and hard money is the way to go for that. However, it offers many other advantages as well.
No Emphasis on Credit Rating
Hard money lenders have less concern about a borrower’s credit history than banks that regard it as a critical part of the borrowing process.
They approve loans on other factors that emphasize borrower equity and the value of a property. They may look at credit scores to verify the ability to repay and the absence of bankruptcies or foreclosures.
Private lenders base loans on the collateral that a borrower has in a property and its market value.
Fast Approval on Loans
With a borrower’s proper paperwork in place, a hard money lender may pre-approve a loan in as little as one or two days.
The primary focus of the lender involves the market value of an asset and the amount of collateral that a borrower holds.
Many private money lenders expect the owner’s equity to amount to at least 20 percent. On approval of a loan, a borrower can anticipate having access to the funds in a fraction of the time that a bank requires, often less than a week.
Less Demanding Qualifications
The market value of a property and the borrower’s equity in it provide a significant basis for a loan from a hard money lender.
Factors that banks focus on that take longer to get approval include income history and a real estate developer’s experience and completed projects.
Hard money lenders do not waste time on matters that seem inconsequential and contribute little of value to the evaluation of risk for approving a loan.
An equity stake of at least 20 percent in an asset that has a high market value establishes the primary qualifications that hard money lenders require.
Realistic Payment Plans
The flexibility that private money lenders can offer a borrower make access to funds much more appealing than bank loans even when they cost more for a short-term.
Borrowers often have the option to structure a payment plan that meets their preferences instead of the rigid rules that banks require.
Hard money lenders have no objection to receiving full payment sooner than the loan documents specify, and they do not enforce prepayment penalties that banks typically consider necessary.
The contact between a borrower and a hard money lender can allow opportunities for both parties to understand mutual expectations so that an amicable business arrangement can exist between them.
What hard money lenders care about
Intrinsically, hard money lenders care about one thing: getting their money back. As a result, they focus more on your overall project itself.
It’s common to see hard money lenders fixate on when, and how, you’ll return their money. For example, when presenting your business plan to a hard money lender – they’ll ask you about what your plan is in terms of the property.
Are you going to sell it? If so when. Are you going to refinance the loan you’ve taken – with a traditional lender? If so when.
Hard money lenders only care about your “end-game,” and everything they ask revolves around that. That means a hard money lender will care only about what your overall business plan is.
The questions a hard money lender asks are very different than that of a traditional lender.
Traditional lenders will focus on your ability to repay the loan based on your existing income, and credit score. They focus on your worthiness, and capability, of repaying the loan over a period of time.
In contrast, hard money lenders care only about the viability of your project. This is due to the fact a hard money lender can take your property over, in the event you default on it.
This one reason is why hard money lenders don’t fixate on your ability to repay the loan – and instead focus on your ability to “manifest,” your final business outcome.
In the event you don’t repay the loan, the hard money lender has the legal right and authority to take ownership of the property/land you borrowed against.
As a result, hard money lenders will often lend up to 60-70% of the value of the property. This means if they take over the property, they can potentially have a profit of up to 30% when they take possession of your property and sell it.
Needless to say, hard money loans are potentially life saving, and very risky, financial instruments. Without one, you could possibly never get the funds in place to proceed with your project. Yet failing to repay it could result in disaster for your venture. Think wisely before doing anything.