From medical emergencies to investments, business and personal development, we are all faced with the need to borrow money to fund a certain need at some point in life. Luckily, financial institutions and private lenders are always waiting on the other end to provide you with the much-needed financial assistance, of course, at a profit.
However, not all loans are equal and it’s important to be smart when taking a loan regardless of the type.
In most cases, lenders of conventional loans such as mortgages and personal loans will consider a wide variety of factors before they can approve you for funding. Some of these factors may include your income, your credit history, and your ability to repay.
More often than not, the process takes a considerable amount of time and interest rates may vary depending on the kind of loan you’re applying for, as well as the lender you approach.
And then there are hard money lenders, who are mainly interested in what you have to provide as collateral. As you can tell from the name, these provide hard money secured loans, which are short-term loans that don’t usually last more than 5 years.
As long as you have a real estate asset to provide as collateral, a hard money loan could be a better option than the conventional loan in a number of ways.
On this note, here are 6 benefits of hard money loans.
1. Quick Approval.
Having to wait weeks for your loan to be approved can be overly intimidating. Before approval, traditional lenders often spend tons of time reviewing your application, checking your credit score, securitizing your credit history, verifying your income, reviewing your bank statements.
The application also goes through a bureaucratic process such that several loan offices have to review it before your loan can be approved or denied.
As earlier mentioned, hard money loan lenders are more concerned about the collateral you have to provide, rather than your credit score, your income or your ability to repay the loan. As long as the value of your asset is worth more than the amount of the loan plus their interest, approval for a hard money loan is almost always a breeze.
A hard money loan spares you the delays and frustration, making it a great alternative, especially when you need quick funding for emergencies.
2. Poor Credit? No Worries.
Millions of borrowers are locked out of traditional loans because they either don’t have a credit history or they have negative items on their credit report. If at all you ever do, getting approved for a conventional loan with poor credit can take ages of waiting in frustration.
Perhaps the biggest of all perks of hard money loans is that your credit history is never a major issue. Unlike with the cases of traditional loans where a low credit rating can be a disqualifying factor, a hard money loan is all about security. In a nutshell, a hard money loan is more advantageous because:
- It’s more focused on (collateral) property value
- It’s not based so much on your credit history
- Can help you tap into your property equity
- Your ability to pay is a non-issue
- Some lender won’t even check your credit score
- A foreclosure on a different property may not affect the approval decision
Additionally, hard money lenders mostly consider your loan-to-value ratio instead of your debt-to-income ratio. In case you fail to repay the loan, your lender can always sell the property to recover the principle along with any interest accrued … it’s that simple!
3. It Provides Flexibility.
The underwriting process used by lenders of hard money loans is also more favorable to the borrower. In case you need a loan on a different property from the one that you’ve already provided as collateral, you can always get approved and the new deal is evaluated individually.
You and you’re lender can always come up with a customized repayment plan that suits your needs, freedom and flexibility that you will rarely get when dealing with a conventional lender.
Moreover, there are various types of hard money loans, including:
- Cash-out refinance – taken by investors to purchase commercial and/or residential property
- Equity Loans – for property owners who already have a mortgage to pay
- Bridge Loans – taken by real estate property owners to make improvements to make a property more attractive to buyers or tenants
4. Less Approval Requirements.
Before considering you for a loan, financial institutions often require you to provide a set of documents that provide proof of your identity, income history, financial history, and so forth. This is among the many things that make ordinary bank loans so cumbersome and the application process lengthy.
With a hard money lender, however, the process is much less burdensome as long as you have a high-value property that you claim at least 20% equity on.
5. No Prepayment Penalties.
Every loan you take has an agreed-upon term within which you should clear the loan in installments. However, it can be a bit expensive on your part if it reaches a point you want to clear the loan earlier.
With conventional bank loans, you may be required to pay a certain percentage (of the amount of the borrowed money plus interest) in early repayment penalties when clearing the loan before the due date.
The good thing with a hard money loan is that there are no prepayment penalties involved – as a matter of fact, you’ll be doing your lender a favor by clearing the loan earlier than expected.
6. Help Avoid Losing Investment Opportunities.
If you’re a (fix-and-flip) real estate investor, for instance, your existing property or equity can provide you with a means to secure funds for further investing. But some high-profit investment deals are so competitive and require you to have the funds ready if at all you’re to beat your competitors to it.
In this case, a hard money loan can be the best option for you, considering that delays in approval are minimal and funding is quicker. It can help avoid losing out on major investment opportunities, as well as other forms of cash emergencies.
In summary, the benefits of hard money loans speak for themselves. They cannot be overstated, nor can they be overlooked.
Whether you have no credit history, you have some negative items on your credit report or your credit score is completely out of shape and you need funds quickly to finance a certain need, a hard money loan can be the best option for you so long as you have a real estate asset to provide as collateral.