The most common reasons for loan applications being denied are bad credit or a high debt-to-ratio income. If you’re looking to purchase a property but are struggling to secure a loan, then a hard money loan might be for you.
What is hard money lending? It’s a non-traditional loan that is common in the real estate industry. Keep reading to find out more.
A Hard Money Loan
In the simplest of terms, a hard money loan is one that isn’t from a traditional lender. Hard money lenders are private lenders, not banks or other financial institutions. It’s a loan with little risk, as the purchased asset is the collateral for the loan.
In other words, it’s a short-term bridge loan and is often used in real estate for quick turnarounds between purchase and sale, or property finance.
It can be difficult to secure conventional financing for certain projects, which is why hard money loans are so popular in real estate lending. For example, if you want to buy a fixer-upper house, work on it, and then sell it (flip the house), then a hard money loan will be the easiest loan to secure.
Hard Money Lenders
As mentioned earlier, hard money lenders are non-conventional lenders, such as private investors or companies. While this can be good for the person securing the loan, as the chances of being denied are slim, it also means the lenders can make their own rules.
They will decide what credit scores or debt-to-income ratio they require from borrowers. Usually, this is much more flexible than the bank and you may even be able to secure a hard money loan even after being denied by conventional lenders.
This is because the most important aspect for the lender is how valuable the property is — not your creditworthiness.
How Does a Hard Money Loan Work?
First of all, you want to ensure that you find a reputable and trustworthy lender that offers quick turnarounds and reasonable rates. You can find some recommendations from mortgage banks and brokers and real estate agents.
As interest rates for these loans are very high (11.25% in 2020), these are short-term loans and you want to pay back the money as soon as possible. Usually, these loans last between 1 and 3 years.
This is why it’s important that you choose the right property that is going to be profitable. Remember, if you fail to pay the loan, the lenders will claim the property.
Benefits of Hard Money Loans
Do you need a hard money loan? Check out some of these benefits:
- Ideal option if you’re denied a traditional loan
- If your credit score is low, hard money loans are suitable
- Loan agreements more flexible than traditional loans
- Quick turnaround time
If you’re looking to secure a short-term loan as quickly as possible, then this may be a good option for you.
What is Hard Money Lending?
So, what is hard money lending? To sum it up, it’s essentially a non-traditional loan from a private lender where the purchased asset is collateral. It’s commonly seen in the real estate industry for flipping houses and short-term housing finance.
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