Hard money loans share disadvantages and advantages. One advantage is the hard money loan application process is quick and easy. The loan may be funded quickly, normally within five to 10 days, in contrast to the conventional underwriting process, which may take weeks, or even months, if approved whatsoever, if accepted.
A hard money loan may also improve a current purchase offer. Hard cash lending is recognized as a more powerful offer by the seller compared to standard bank financing alone.
Hard money loans also allow borrowers with less than stellar credit to obtain financing. Even when the borrower has dilemmas, such as a poor credit rating, inadequate income, short sales, foreclosures, as well as bankruptcy, they still have use of capital.
For commercial property owners or companies, one key advantage from hard money loans is the ability complement additional financing, or even to ensure liquidity. In order to reinvest this capital for purchases or renovations for example, a borrower can make use of a hard money loan to pull equity from an existing property. Specifically for opportunistic investors who wish to move fast but do not have the required liquidity, a hard money loan can help act almost just like a bridge loan—interim financing that sets the stage to get a future round of financing as time goes on.
Hard money loans come with several disadvantages.
One is that interest rates on hard money loans are typically more than conventional loans. The price of the cash being loaned out will therefore be higher, since the duration of the loan is usually shorter. Hard money loans also charge more in “points or pre-paid interest”, because of the duration that is shorter, which also makes these loans more costly. A loan that has points above the rate of interest could be costlier up front, but will carry interest charges that are less with time.
Hard money loans are also disadvantaged in that the borrower has to have an important position in the deal. Most hard money lenders require even more equity in the offer or 25 percent. Lenders will require that borrowers have skin in the sport since the loan has been in line with the total equity of the property itself.
The time variable is, in addition, an additional potential disadvantage. Should the borrower endure a financial setback along the way, the capability to pay back the fiscal well-being of the borrower and also the loan comes into question.
As hard money lenders themselves are relatively unregulated, borrowers run the chance they could work with deceptive parties. Coming across a list of local lenders doesn’t always ensure working with lenders that are legitimate. Hard money lenders are available through local resources, including tax professionals, or through property investor meetings.