The Pros and Cons of Hard Money Lenders

You may have heard of friends or others, who get loans for real estate purchases through what are known as hard money lenders. Many speak positively about the benefits of hard money lending, but before you resort to using them, there are things that you should know about them.

What is a Hard Money Loan or Lender?

A hard money lender is a lender that is not a traditional lender, like a bank. The lender may be an individual, an investor, or a private company that provides loans. Like traditional banks, the hard money lender will expect that the home you are buying, be collateral for the money they are loaning to you.

But outside of that, the similarities between traditional lenders and hard money lenders, end.

Collateral Required

Banks will generally only require that you put the actual property or home you are buying as collateral for the loan. Hard money lenders however, will often have you pledge other collateral, such as personal property or cars or other assets, to secure the loan.

The hard money lender will always want a higher loan to value ratio than a bank might—that is, you won’t get much more than the appraised value of the home, with a hard money lender.

The good part of this is that because you are pledging your assets for repayment, hard money lenders don’t care as much about your credit, so those who don’t qualify for traditional loans, have an avenue to borrow money. Of course, the bad is that you could lose more of your property on a default, than you otherwise would with a traditional lender.

Quicker Approval

Hard money lenders do have a much quicker approval process, with less paperwork. You may be able to get approved for a loan in days, as opposed to a month or more with a bank.

Nontraditional Loan Terms

But hard money lenders can use whatever terms they want in your loan—they aren’t federally backed, like many banks are, and don’t follow normal regulations.

So, for example, your interest rate on a hard money loan, or the default provisions, or repayment terms, may be shorter, harsher, or more expensive, and may provide you as the borrower, fewer rights in the event of default, than you would get with a normal bank loan.

Some hard money lenders can use some draconian terms—such as acceleration of the entirety of the loan, or no notice of default, or they may require you to waive defenses to foreclosure you may otherwise have.

So Who Uses Them?

Hard money lenders do have their place. Many people looking to flip properties use them—the quick turnaround means that borrowers aren’t as concerned about long term loan provisions, or defaults.

High interest rates aren’t a concern either, because flipping investors aren’t looking to hold property and payback loans for extended periods. And, investors can close on properties quicker, making it easier to grab good deals.

Questions about borrowing money for your closing? Call the West Palm Beach real estate lawyers at The Law Offices of Larry E. Bray today if you’re buying or selling property.

Sources:

lendingtree.com/home/mortgage/hard-money-loans/

bankrate.com/mortgages/hard-money-lenders/