Hard money lending is very popular in the USA; however, before applying for any loan, you must be aware of its advantages and disadvantages first. This type of loan is quite popular in the real estate industry. Veteran investors in real estate know about hard money loans well; however, if you are new to the concept and wish to apply for a loan, it is crucial to be aware and educated first. If you know what a hard money loan is and how it works, you can make better-informed choices. At the same time, you should be aware of its specific advantages and disadvantages before you proceed with the application process. This post will be your guide to hard money lending and whether it is the right type of loan for you or not- read on!
Hard Money Loans- Why do they score over bank loans in the market?
Hard money loans versus bank loans- this is a question that most people ask themselves when it comes to applying for funds for the purchase of real estate. The following are the top reasons as to why hard money loans are better than bank loans when it comes to buying real estate in the market-
- Quick approval and funding – Hard money loans are quick in approval and funding. In most cases, you can receive the loan in one day. Hard money lenders consider property, the sum of down payment or equity the borrower has in a property, the experience of the borrower and the exit strategy for the property along with cash reserves so that the borrower can repay the loan in monthly payments within time. The hard money lender will check the above criteria, and if everything is in place, the approval is done quickly. Investors new in the field of real estate will be happy to know how fast a hard money loan is approved when compared to banks.
The hard money loan can be funded in just 3-5 days if necessary. If you compare this to a bank, funding takes 30 days on an average. This quick funding process has saved several investors in the field of real estate. Most of the time they could not buy the real estate primarily because the original lender could not deliver their money on time. This is where a hard money lender steps in to save the day as the funding process is quicker and the deal can be done faster saving the escrow process.
- Lesser requirements than bank loans- If you compare hard money lending to bank loans, you will find the former has lesser requirements. The only criteria that hard money loans have is the borrower should be able to make monthly payments towards the loan in time. Banks generally have a very long list of requirements when it comes to the approval of a bank loan. They are known for refusing people more, and their eligibility lists almost change every year making it very hard for people to get their loans approved. Besides the above, banks also have specific issues that stop them from approving a loan. For instance, recent foreclosures, bankruptcies, modifications to loans, short sales, bad credit, and other shortcomings stop banks from approving the loan. Esteemed name in the field of money lending https://www.libertylending.com/ says that one should note that if a borrower has 4 mortgages, banks will not give them a loan even if the borrower has a perfect credit score.
However, if a borrower has the above issues, a hard money lender will still give them money as long as the borrower can make at least 25-30% of down payment in the said property. This percentage is the security for the borrower’s loan that ensures he will make the agreed repayment towards the loan every month within a specified date. This amount is also used for making the balloon payment when the term of the loan ends. If a borrower wishes to buy a primary home with a hard money loan via a private mortgage, he can buy the property with the loan and later work towards repairing the issues he faces or wait for a time for the issues to be cleared.
Once these issues have been cleared, the borrower can refinance the loan to a lower cost with a conventional lender like a credit union or a bank. You should also note that banks are generally not willing to give home loans to self-employed people or those that lack a two- year employment history in the current situation. Otherwise, the borrower is generally the right candidate to apply for a bank loan.
- Funding for projects that conventional lenders do not give you- Hard money loans provide you with the funds for projects that otherwise conventional lenders do not give you as they have no interest in the financing like for example the fix and flip loan. This implies that the investor in real estate buys the property with a short-term loan so that quick repairs and other updates can be made to the property and then sold in the market. In such cases, the investor in real estate needs a loan for a year.
Banks generally refrain from giving out a 12- month loan as it does not work with their business model. Banks generally like to lend funds for long-term periods as they want to earn interest on these loans over a duration of time. Moreover, even if a property has serious issues like plumbing, electrical, foundation, etc hard loan lenders will not refuse funds. However, banks will not agree to issue funds for any property that has issues. With a hard loan, a borrower can make all the repairs needed and refinance later with a conventional bank loan if desired.
Therefore, from the above, it is evident that hard money loans are better than bank loans when you are investing in real estate. They have advantages to make the whole process of real estate transactions easier for you. They are quick and are less complicated to apply for. Moreover, if you are looking for short-term loans for your real estate purchase needs, banking for hard money loans is indeed a wise choice for finance!