A hard money loan is a short-term bridge loan opted for as a last resort. Like any other loan, a hard money loan is a sum of money that is borrowed from a lender.
Hard Money Loan In Action
A hard money loan is backed by the physical asset, which is the property being purchased, not by the credit worthiness of the borrower. Real estate investors who want to do a gut rehab or a quick property flip commonly use hard money loans.
In this type of loan the borrower receives the money, while the lender receives monthly interest on the loan until it is paid back in full. The lender will also often charge the borrower an up-front, one-time fee in order to process the loan.
Hard money loans or rehab loans in Dallas are also used by individuals who are unable to get a mortgage from a bank due to a poor credit score or because the property is in such a bad condition. Since traditional lenders such as banks do not find much charm in making hard money loans, hard loan lenders are sometimes private individuals that see value in this type of potentially risky venture.
Where Does Hard Money Loan Make All The Good Sense?
Generally, hard money loans make the most sense as short term loans lasting from one to five years, mostly required by fix-and-flip investors. So, although hard money loan is expensive it has its importance for certain borrowers who cannot acquire traditional funding at the hour of need. You should be mindful of the fact that with this type of borrowing you place your property at direct risk of a potential confiscation in an event of non-compliance with or defaulting on the repayment schedule for one reason or the other. This alarming feature alone provides assurance to the lending faction that the loan is repaid in full within the stipulated financing period, maintaining your credit score for subsequent financing practices in times ahead.
When Hard Money Loan Becomes A Bed Of Roses?
Hard money loan carries several attractive features for a real estate investor to fall for. These benefits generally overshadow the various drawbacks presented by it simultaneously.
Speedy & Rapid Processing
Having to deal with a single private money lender in Dallas or a small group of private lenders, there are fewer obstacles to cross over and much more convenient documentation work. Since hard money lenders in Houston or Dallas are least interested in your credit score or your debt amount, you always find yourself qualified for the acquisition of such a loan in dire hours of need. Least to mention, you could have the loan amount transferred to your account within a few days as against a couple of months required for a more traditional mortgage.
Flexible Terms & Conditions
One of the most favorable characteristics of a hard money loan is its added flexibility that if offers in comparison with conventional loan agreements. Lenders deal each case individually and don’t opt for a corporate level underwriting process nor a set pattern of application. With respect to the presented situation, the borrower may be able to tweak and modify certain terms and conditions according to their ease of payment and come up with an entirely tailored repayment schedule. There are no stringent and rigid set of policies and principles to be followed, since you are faced up with a credible person who is firstly a human and then a cash lender.
Lender At A Minimal Loss
For a hard money lender in Houston or Dallas, what really matters is the value of the collateral (your backing physical asset) that would be assessed against the demanded loan value. Since most of the investor loans in Dallas are kept at the lowest loan-to-value ratios, the lender would end up negotiating at a loan amount of 60 to 70 per cent of the collateral market value that assures a win-win situation for the lender as well. In case of a default on the part of the borrower, the lender is certain of disposing the collateral quickly and at a reasonable rate to stave off from forfeiting their profitability.
When Hard Money Borrowing Can Be A Barbed Path?
With all goodness attached to hard money borrowing, certain risks and drawbacks do plague its advantageous phenomena. Let’s go through them in order.
High Processing Charges
The processing charges or the origination fee levied by the lender in the due course of processing the loan generally reaches a phenomenal value; it can normally escalate to a staggering 5% of the loan amount as against a mere 1% charged at any bank or a financial institution. The underlying reason? Yet again and quite logically too, the extent of risk involved entering into such a business deal causes the lender to take apt measures for maximum financial safeguard against an “uncertain” future.
Abnormally High Interest Rates
Exorbitant interest rate is to hard money loan as milk is to tea. This is seen as quite a discouraging trait, with interest rates lying in the brackets of 10 to 20 per cent. Since these loans are meant to be the last resort of meeting one’s needs, the lenders are well aware of the rules of the game and they do play their part exceedingly well. The higher-than-normal interest rates can well be attributed to the financial risk that the lenders are forced into selling at a higher price to the investors.
Being Short-term As Its Shortcoming
Real estate investor loan in Houston are usually kept short-lived so as to be repaid within a few months to few years, unlike its counterpart traditional loan that is commonly mortgaged at a 15-year to 30-year term of full repayment. Defaulting on repaying the hard loan may result in the elevation of the already colossal interest rate, or worst still, confiscation and dissolution of the collateral property in order to make good the losses incurred at the lending end. So, borrowing from a hard money lender needs you to think twice prior to going for it.