It can be challenging to secure a regular mortgage if you plan to purchase a home to rent out or flip. It could be even more challenging if your credit score is below the minimum requirement of the typical lender or if you require cash sooner than a lender can supply it. This is when most borrowers turn to hard money loans.
What Is a Hard Money Loan?
Hard money loans refer to short-term guaranteed loans—secured by the asset you’re buying. They’re not offered at the banks. Instead, alternative lenders, such as retail investors and private corporations, provide hard money loans and often disregard poor credit scores and other financial concerns in favor of the asset-backed property. While obtaining a hard money loan may require fewer steps, this sort of lending has dangers and isn’t the ideal option for most people.
Pros and Cons of Hard Money Loans
Now that you know what hard money loans are, let’s see some of their most common benefits and drawbacks.
Pros of Hard Money Loans
- Fast turnaround: Hard money loans are easier to close than ordinary loans. The lending institutions offering these loans are mainly concerned with your stated collateral; your financial state and employment condition are secondary concerns. As a result, there are no in-depth checks of bank records, tax filings, or credit reports.
- Flexible terms: Hard money lending firms evaluate deals on a case-by-case basis, unlike traditional lenders who use the conventional underwriting protocol. Here, you’re dealing with an individual or business and not a commercial bank with set policies; therefore, you can negotiate your convenient payment schedules and the loan length.
- Approval amount: If you’re buying an appreciating asset, the lender will provide you with a loan for the total property value. The loan amount is determined by the value of a separate property you own. You won’t be compelled to pre-qualify for a specific loan amount, then look for property based on the pre-approval, as you would with a traditional loan.
While a hard money loan can seem to be an appealing option for individuals who are unqualified for a typical loan, these loans can be exceedingly dangerous. It’s critical to analyze all of the dangers they present.
Cons of Hard Money Loans
While there are advantages to hard money loans, borrowers must also evaluate the risks. Some of those risks include the following.
- High-interest rates: The interest rates imposed on hard money loans are consistently higher than standard loans. Lenders take on more risk by giving you the luxury of fast access to funds for your property investment and they compensate for that by offering loans with high-interest rates.
- Varying down payments: Hard money loans’ application and settlement fees are more significant. In addition, they usually ask for a bigger down payment, from 25% to 30%.
- No long-term loans: The longer the loan duration, the greater the risk taken on by the lender. The return on a lender’s commitment to your property could be less than the return on a new trust deed investment. This puts the lender at risk of higher interest rates, discouraging them from making long-term loans.
All these shortcomings add to a hard money loan being a costly method of borrowing money. Alternatively, you can always seek out other options in Australia, such as the Viva Payday’s cash in 1 hour no credit checks Centrelink.
Your circumstances heavily influence your decision to obtain a hard money loan. However, before signing for a secured loan, ensure you assess the dangers and the expenses. Before borrowing any loan, make a plan for repaying it. Besides losing the property you set up as a guarantee, failing to repay a hard money loan can severely affect your credit score. These results will put you in a worse financial situation, making it harder to borrow money afterward.