When you obtain money from some people who are not traditional lenders supported by the authorities, it is called hard money credits. They do not want much proof from you about your financial status. The main thing for them is collateral meaning your property that they can sell if you are not able to repay the loan.
Such loans are used by those who want to get money quickly without any additional checking of the entire documentary. If you are like that, these credits are right for you. Now, let’s have a deeper look at what hard these loans are all about.
Real Meaning of the Notion of a ‘Hard Money Credit’
Most loan lenders require that you should prove your credit scores and financial ability to repay. Though, you do not need anything special for obtaining hard money. Of course, if your history of repaying your borrowings measured by the ratio of debt to income is great, you can get any credit quite quickly.
Anyway, even with a lot of income and good credit history, it can take you much time to get credit from a traditional lender. If you have negative points in your record or you experience difficulties in verifying the ability to pay, all the procedures may take ages and, ultimately, you may not be approved of at all.
The security of a hard money loan depends on your collateral and this is the only thing that weighs much for your lender. They understand that if you are not able to repay, they can get your collateral and use it as they like. Your financial status is not as important to them as the total cost of your collateral.
These loans usually have higher interest rates than those for traditional loans. Therefore, these credits are much shorter – from 1 to 5 years. And you would not like them to be longer, either.
Who Is Hard Money Geared Toward?
As it has been already stated, hard money is widely used by some short-term project investors into real estate who repair the property and then sell it. Such deals are very fast and you need much cash, of course, for this flashy deal. Otherwise, your offers won’t be competitive enough and your possibilities may seem quite limited.
There are two main purposes hard money credits are usually used for:
Option 1. So-called fix-and-flip deals are usually made quickly, the property is restored in a while and then sold for a higher price to repay the loan and to get some benefit from it.
Option 2. This may be a gap between the property purchase for long-term use if it needs to be bought very quickly, and finding a better financial solution. There are also buy-and-hold companies who buy and renovate objects and after that refinance the client’s debt to a traditional credit lender and then pay back to a giver of hard money credit.
Benefits a Hard Money Credit Offers
So, the question is why you should opt for these credits if the conditions are not favorable for you. However, there are some borrowers who need costs badly and fast. Here are some reasons why you can use the money borrowed in this way.
Is Such a Loan Reasonable at All?
It sounds trivial but this type of loan makes sense only if it is a short-term credit. That is why it is a favorite type of loan for those investors who buy old and damaged property, restore it, and sell at a much higher price. In this case, they can repay the loan and get some benefit as well. You may, of course, take hard money and buy the property where you will stay for a long time. In this event, it will be better for you to repay the credit as soon as possible after finding the most favorable option for financing.
Their Speed Is Great
Lenders usually would not like to verify every letter in your financial reports. Why should they do that if they have your collateral at their disposal? It is very important when the demand is quite hot on the loan market and they can make money very fast.
The Agreements Are Flexible
It is explained by the fact that lenders commonly do not use traditional approaches and procedures. They just evaluate your collateral and then, your agreement does not follow those strict policies applicable to traditional loans. For example, you can regulate your repayment schedule if you can discuss your situation with lenders if they are interested enough.
Why Approval Is Essential
Among the serious causes of your loan denial, there is a foreclosure or bad credit report. Lenders do not even care about such applications. The most important thing they are interested in is the value of your property you are going to use as collateral. You will be given as much money as your property costs. If you would like to receive more, you will be rejected or it can be a subject for discussion if a lender considers your possessions valuable enough.
That is why getting your credit approval from a lender is a very important thing. To approve your credit, a giver uses an LTV ratio. It means correspondence between the sum of a credit and the value of your property used for collateral. The maximum limit can be 50 to 70 percent. It may seem rather low to you but in this case only, givers will be ready to provide you with a hard money loan because they are sure that they can sell your property at a good price if you have some financial issues.
Obvious Minuses of Hard Money Credits
As you have already seen, such a type of credit is far from perfect. It may seem quite simple, of course, especially for those who consider it as the only option. You need to remember one thing – this credit is rather expensive and this is the most considerable minus. If you fail to repay it, your existing property or assets will be lost for you.
So, if you think that your financial situation allows you to be qualified for some other forms of credits, and you do not have any Plan B on how to make money on it, try these different options. For example, you can regard FHA loans. Moreover, if you cannot qualify for any other loan because your property is damaged and needs some restoration, there is a special FHA 203k credit that can help you repair it at a much lower cost.
In short, it is only you who is to decide. Consider all the options and choose the one which is the most suitable for you at present. Be attentive and careful while choosing a lender for hard money. Find a reliable private agency or individual with a strong reputation and a lot of recommendations. Who knows – maybe, this will be your true way of establishing a business of your own and gaining financial independence.