Noteworthy Benefits and Drawbacks of Hard Money Loans
Buying a property can be financially tricky. Say you’re unable to secure a mortgage because of shaky credit. Hard money loans can be ideal in such a scenario. This financial instrument is perfect for many. Examples include business owners who don’t qualify for traditional financing, house flippers looking to invest elbow grease into a property, and rental owners wanting a quick source of cash flow. Convenient as hard money may be, access comes with downsides. Weigh the good against the bad before accepting one of these deals.
Benefits
Hard money loans are attractive for numerous reasons. One is that they close extremely fast. Applying, getting approved, and having the money arrive in your account could all happen in as little as a few days. Compare that with a loan from a bank, which might take as long as a month for everything to occur.
The approval process is much less intense than with a traditional loan. Hard money lenders use the property you’re buying as collateral. Therefore, a deep dive into your finances is unnecessary. While your fiscal history can play a role, it’s not as important as the value of the piece of real estate you’re buying.
Hard money dealers are also free from rules that bank lenders must strictly observe. Thus, they’re able to ignore your credit score and care little about your debt-to-income ratio.
Drawbacks
While the advantages are real, so are the disadvantages. To begin, the interest rates they offer are typically unfavorable. The reason is that lenders are generally assuming a high level of risk, certainly more than lenders who deal with more traditional loans.
Additionally, borrowers are more likely to face a hefty down payment. Again, the explanation is that the lender is taking a risky gamble. It’s not unheard of for hard money borrowers to leave lenders high and dry. Making a down payment upfront gives your financier confidence that lending to you will not result in a complete loss.
These deals are also inappropriate for anyone seeking a long-term arrangement. Conventional mortgages often last between 15 and 30 years, allowing for low monthly payments. Expect the hard money offers you uncover to require total repayment within three years. You might even have a deadline as soon as one year from the start of your contract.
Deciding whether you should take out a hard money loan depends on what you need. Perhaps you’re able to accept the terms that come with these agreements. If so, further investigate this financing alternative.
