Hard Money Loans: 5 Benefits

A hard money loan is an asset-based loan financed by asset collateral.  With hard money loans, the collateralized asset is a piece of real estate. The amount of the loan is assessed against the "quick sale" value of the real estate.  Hard money loans use a loan-to-value ratio (LTV) of approximately 60 to 70% of the purchase price that could be obtained for the property if it were on the market today.  

Hard money loans are issued by private lenders or lending institutions, and almost never from a deposit institution or commercial bank.

Hard Money Loans:  Benefits

Individuals and businesses usually seek hard money loans because they don't meet the requirements for a bank loan. An asset-based loan are best-suited for people who need money fast or require a larger than normal loan.  It can also be beneficial to people with poor credit. Hard money loans have often been obtained for the same purpose as "bridge" loans; to carry a person or company through a short-term cash shortage. Typical uses for hard money loans are staving off foreclosure, covering payroll, and acquiring the money for a business start-up.

The stigma of pledging your assets for cash with a hard money loan is fading as the practice becomes more common and is used for a wider range of purposes.

Some of the benefits of hard money loan are:

No Credit Check.

Because the loan is secured by the value of a hard asset - real estate - the credit rating of the borrower can be imperfect. This is often the reason borrowers will seek hard money loans. A hard money loan often requires no credit score at all, or the lender will accept a very low credit score (below 500).

Relatively Low Fees and Interest Rates.

Traditionally, a hard money loan has been considered risky for the lender, and so it carried a higher interest rate than a loan obtained from a bank. But as hard money loans have become more popular in recent times, competition has become more intense, and lenders have had to drop their interest rates. Be aware, however, that interest rates for hard-money loans are still unlikely to be as low as with a bank loan, but they are not as high as before.

Loans for Property of Uncertain Value

For a person or company contemplating the purchase of an asset of indeterminate value such as undeveloped property, a hard money loan is often the solution to getting the cash required for the purchase.  Purchasers of rural property, in particular, often seek a hard money loan, because banks resist making real estate purchase loans where the value of the property derives from the land and not the house (as in the case of, for example, a ranch).  Regular lenders also don't like unconventional construction - if you want to build something that is not a traditional frame or box with conventional material, your best bet might be a hard money loan.

Cash Needs Met Quickly.

Sometimes a potential borrower is simply unable to verify their income quickly enough to make the loan process worthwhile for a bank, or the borrower wants to get a financial deal done fast and doesn't want to spend the time dealing with red tape.  In these situations the borrower can use a hard money lender suited to their needs and get the process in turnaround much faster and more easily.

A Note of Caution

Because any unregulated financial system can attract shady practices, it's important to confirm the good reputation of your hard money lender.  A red flag to watch out for to tell good faith hard money lenders from predatory is whether lender demands exorbitant fees up front.

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