Common Questions (With Answers) About Hard Money Loans
Here are some of the most commonly asked questions about hard money loans with short, easy to understand answers which will help improve your understanding of what these loans are and how they might be used in your own financial investments.
- What is a hard money loan? A hard money loan is a loan issued by a private investor or company instead of a big banking institution. The borrower secures their loans based on the values of the properties themselves, rather than the borrower’s credit worthiness. They are typically done a lot faster than traditional lending institutions and are usually planned for the short-terms instead of the long term. They are sometimes referred to as bridge loans.
- Why would you choose a hard money lender over traditional lending services? Because the borrowing criteria are much easier to achieve, many real estate investors, people with poor credit and those needing bridge loans as they move from one home to another often turn to hard money lenders for financing. When other financial institutions often tell these people, “No,” a hard money lender will say, “Yes.” Many choose to use hard money loans for renovation costs, so hard money loans are very popular with those people who are into real estate investments.
- What are the risks? A hard money lender has higher lending rates. Hard money lenders typically charge around 5 points and 15% interest. Local lenders may charge less, but almost all are significantly higher than bank loans. The terms are also a lot shorter. Instead of spanning a loan over 15 or 20 years, these will be more along the lines of one or two years.
- What are the benefits? A huge advantage to using a hard money loan is the speed of which you have the money. If you’re in a real estate deal with a competitive market, speed is key to landing the property you want. A hard money lender can close a deal in about five to seven business days versus the traditional 30 to 45 days for traditional banking institutions. You also don’t have to have a perfect credit score because a private loan is more interested in the value of the property than the credit score of the borrower.