The Benefits and Disadvantages of Hard Money Loans for Real Estate Investors

Property development companies with a long and stable track record are generally in a better position to access bank finance, which, however, may prove to be elusive for individual investors with credit histories that are less than perfect even though the profit potential of a particular real estate asset is very high. This type loans are the ideal answer to the requirements of individual real estate investors who are not eligible for bank finance yet would like to take advantage of the lucrative opportunities in real estate with quick and no-fuss loans.

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Page Contents

What Is A Hard Money Loan?

This type of loan is simply a private lender that is backed by a hard asset, in this case, the property rather than the credit score and documentation of the borrower. Unlike conventional bank loans, the repayment of the hard money one comprises of only the interest component on a monthly basis with the principal being returnable as a bullet payment on the expiry of the this period. Apart from the interest that is normally far higher than conventional bank ones, the lender will also charge an upfront fee for processing. The terms and conditions of a this loan are quite flexible with the lender and the borrower coming to a mutually satisfactory understanding. They are extremely popular with individual real estate investors simply because they are structured especially to meet their need of accessing the money quickly without them having a good credit history and extensive documentation.

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The Typical Uses of Hard Money Loans

This are especially favored by individual real estate investors who are in the business of spotting run-down properties that they quickly rehabilitate and sell off in a short period of time. The potential of making large profits by fixing and flipping properties is drawing an increasing number of investors who tend to operate locally in the markets they are familiar with. Such type thinks are especially useful because the lenders do not insist that the borrowers have good credit scores or on bureaucratic processes of calling for and examining a large number of documents testifying to the financial stability of the borrower. The hard money lenders are more interested in the current market value of the asset because it represents their security in case of borrower default. They , therefore, are extremely agile and can process even relatively large loans within a matter of days in sharp contrast to the weeks and even months banks take to process loan applications. Online lenders can even process loan applications in a matter of minutes. Click here to learn more.

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Advantages

Quick loan processing

Lenders of hard money are extremely alive to the quickly-changing real estate market forces, have the ability to appreciate the merits of a this application, and make the disbursement very quickly, usually in a matter of just a few days. The quick processing is further helped due to the fact that these lenders are more interested in the market value of the property being invested in, than the credit score and the ability of the borrowers to furnish detailed financial statements and projections. The process of this becomes even faster when the borrower has had a stable relationship with the lender for some time.

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Ability to borrow more

Traditional mortgage finance involves a down payment of at least five percent of the property purchase value while banks prefer that you invest at least 20 percent to give you reasonably good terms. Borrowers with less than 20 percent equity are required to purchase mortgage insurance that is an extra cost that you have to bear. Typical such loans require a margin of 10-15% though lenders are prepared to be very flexible depending on the circumstances of the deal. If a buyer has already been identified, and the loan period is very short, there are plenty of hard money lenders who may even extend the full amount of the purchase price as a loan. The origination fee in such cases is the actual income of the lender.

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Flexible Terms and Conditions

Among the many reasons why such thinks are so popular, the flexibility of terms and conditions must surely rank as primary. The market opportunity for hard money process is considerably assisted by the fact the traditional banking is extremely bureaucratic and rigid. Borrowers have to ensure that their profile and requirements fit the lending standards of the bank to be eligible for a loan. On the other hand, hard money lenders and borrowers can actively work together to structure a loan that will allow the investor to take the market opportunity by the horns and conclude the deal as fast as possible.

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Disadvantages

High cost

Perhaps the biggest downside of a hard money loan is the high rate of interest.According to https://www.huffpost.com, depending on the market dynamics, the rate could be over 10%, which is considerably higher than that charged by banks. However, when you consider that the loans are being made to people who generally cannot meet the eligibility criteria of banks, have poor credit scores, and the property itself may be distressed, the high rates may seem to be more justified. Borrowers are also expected to pay loan origination fees that may be as high as five percent of the loan amount, especially when the period is short. For overnight procedure with a very quick repayment, interest may not be charged at all and only an origination fee is applicable.

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Loan period is short

Most of hard money loans are available for periods that may range from a few days to a few months and it is relatively rare for them to extend to a few years. The high rate of interest is a serious disincentive for borrowers to take the it for a longer time.

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Conclusion

The limitations of conventional financial inter mediation to address the needs of real estate investors who need speed and hassle-free processing so that they can take advantage of market opportunities have given birth to hard money lending. This form of finance is especially suited to individuals who do not possess the credentials required by a bank yet have the expertise to make lucrative profits from short-term real estate investments.