Hard money loans are an alternate funding source for real estate investments that can often be more accessible than more traditional loans. Whether or not a hard money loan is right for you depends on several factors. If you are looking to fund a real estate investment, here is what you need to know about hard money loans.
What Is the Loan?
A hard money loan is a collateral-based loan. The loan is short-term and you must make payments throughout the duration of the loan.
Hard money loans are funded by private investors who do not rely on the same standards as more traditional lenders. For instance, your creditworthiness might not play such a major role in determining if you are eligible for funding. The lenders would instead focus on the value of the real estate you are using for collateral.
Why Should You Use It?
A hard money loan is ideal for investors who are in need of cash quickly. The loan does not have the same lengthy process that traditional loans have. This can be particularly beneficial if you have discovered a real estate bargain that requires quick action.
Hard money loans also are usually based solely on the value of the real estate. Even if you have bad credit, you can still get approved for a loan.
The benefits of a hard money loan can extend to the actual purchase of the real estate. Since the loan approval process is relatively short, it is possible for you to make a cash offer on the property in which you are interested. The seller might be willing to reduce the listing price since you are paying in cash.
Are There Disadvantages?
As with any loan, there are some drawbacks to consider before taking out a hard money loan. For instance, the interest rates for the loan tend to be higher than traditional loans. Lenders tend to have higher rates because there is an increased risk with this type of loan since the borrower's credit history is not factored into the approval.
Although the length of the loan can be an advantage, it can also be a disadvantage. At the end of the term, you are expected to have the loan paid off or you could risk losing your collateral. It is important to note that lenders heavily assess the value of the collateral property before making a decision. If you are approved for a loan, there is a good chance that you will be able to sell the property within the timeframe you wanted and repay the loan before any action is necessary.
Share28 June 2016
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