Hard Money Lending for Real Estate – Is it a good idea?
Hard Money Lending for Real Estate - Is it a good idea?
What is the first thing that comes to your mind when you think of hard money loans? Risk? Shady lenders? Loans with a very high-interest rate?
Generally, hard money lending is looked down upon because of the risk involved. However, gone are the days when such loan wasn’t even considered as a potential option for financing. Now, many people opt for hard money lending, especially for real estate.
If you opt for the services of a reputable hard money lender, this way is an excellent idea for getting the money you need without having to go to banks and prove your creditworthiness.
What is hard money lending?
Hard money loans are often called private loans or bridge loans. These loans are generally short time instruments that you can use to finance your real estate project. This type of loan is often sought by real estate developers to purchase, renovate and resell a property. The amount generated from the sale is commonly used to pay back the loan.
In hard money lending, rather than going to a bank or other financial institution for money, you approach a private individual. Here, your creditworthiness is not used as a measure of whether you should receive the loan. Instead, hard money lenders give loans based on the value of the real estate property in question. Here, the “after repair” value of the property is gauged, and the loan is offered accordingly. Compared to other traditional options, these loans do charge a higher interest rate. If you reside in the USA, options like the Houston Hard Money Loans are well-reputed for their hard money lending.
Why is hard money lending a good idea?
Here is why hard money lending is a great idea for real estate developers and house flippers alike.
The lender, in this case, is not interested in your financial standing. Therefore, less background check is required. They don’t review your bank statement or your income. Instead, a lender is more concerned about the collateral instead. Therefore, hard loans are generally faster to process and close than conventional loans.
There is no standardized underwriting procedure when it comes to hard money agreements. Instead, the deal is altered as per the requirements of the given contract. For example, you can modify the repayment schedule to suit your needs. Why are hard money loans flexible? This is mainly because, here, you are not negotiating with a corporation. Instead, you are dealing with an individual who is more likely to understand your perspective than a giant entity.
If you have ever applied for a traditional bank loan, you would know that getting it approved is no piece of cake. It is quite a struggle. This is because banks are very strict about who they give loans to. They check your credit rating, income and bank statements with a fine comb before approving the loan.
On the other hand, the only thing hard money lenders care about is the collateral. They approve the loan based on the value of the property. Some lenders don’t care about our credit rating at all while others might ask about your personal finance. So, the approval rates are high. However, the loan to value ratio delivered by hard money lenders is very low. For instance, you might get 50 percent of the value of your asset as a loan. This ensures that lenders can sell your property and get back their money if things go south.
The con of hard money lending
The only significant flaw of hard money lending is its cost. Compared to all the other options available, hard money lending is quite expensive. The interest rate charged is high. But it makes sense. After all, hard money lenders don’t ask for much when giving you the loan. This makes it a risky investment for them. And as rules of finance go, the higher the risk, the more the interest is charged. But this doesn’t take away from the fact that from a borrower’s perspective, the cost can be an obstacle. However, if you don’t have other financing options for your real estate business, hard money lending is your best bet.
If you are in the real estate business and are struggling to find financing for your project, do give hard money lending a try. If you use quality and well-reputed lender, you will get favorable terms along with the desired loans.
Don’t let lack of money stop you from realizing your real estate related dreams.
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