For everyone who lived through the financial crisis of 2008, the phrase "hard money loans" probably conjures up images of shady or predatory lenders that helped contribute to the disastrous housing crash. Because of this, most people don’t have a good understanding of what hard money loans actually are or why they are used. In fact, hard money loans have been around since the late 1950s and remain an important alternative to traditional mortgage loans.
What Are Hard Money Loans?
Simply put, hard money loans, also called “bridge loans,” are mortgage loans that use the underlying property as collateral to secure the loan. If a borrower cannot repay the loan, the lender simply takes back the property and sells it to get their money back.
Hard money loans provide a way to borrow money without going through a traditional mortgage lender such as a bank -- instead, hard money is usually lent privately, either by an individual or by a private company. As a result, the loan process is usually much quicker and is not centered around factors such as income availability or credit score. Instead, hard money lenders lend based solely on the value of the underlying property.
Pros And Cons of Hard Money Loans
Because hard money lenders do not concern themselves with a borrower’s credit score or income, these loans are often a great choice for those who would not be candidates for traditional loans. Since these loans are backed entirely by a physical asset -- the property -- borrowers do not have to prove they have a reserve of wealth to cover repayment.
Additionally, hard money loans tend to have terms that are more flexible than traditional loan terms. Because the loans are backed by property which can vary widely in value, there is no one strict set of underwriting rules that hard money lenders adhere to. Instead, each loan is evaluated individually. As a result, depending on who the lender is (and the relationship they enjoy with the borrower), there may be room to negotiate things like repayment schedules.
Another major plus for hard money loans is the fact that they are usually processed quickly and can give borrowers more money up front without the need for a down payment. Because lenders do not need to scrutinize credit scores and borrowing history, hard money loans usually can be closed in a matter of days, giving borrowers a chance to have cash in hand much faster.
The main drawback of these kinds of loans is the high interest rates, which are used to offset the relatively large risk hard money lenders assume. Since these lenders do not rely on credit scores, less is known about a given borrower’s history, which translates to a generally riskier lending scenario. So, while traditional mortgage loans may come with an interest rate of around 4-5%, hard money loans can often have rates that exceed 10%.
Hard money loans are usually shorter-term than traditional loans, maturing in a matter of months rather than years. As a result, they tend to be preferred by people like real estate developers, who plan to hold onto property for only as long as it takes to renovate and resell it. Since these individuals complete their renovation projects relatively quickly, the high interest rates characteristic of hard money loans don’t pose as much of a problem. Alternatively, if a renovator wants to hold onto the property for awhile, they obtain hard money loans to complete their projects, then refinance the loan with another, more traditional lender to take advantage of lower interest rates.
GROUNDFLOOR’s Hard Money Loans
GROUNDFLOOR is an alternative hard money lender for individuals looking to complete short-term residential real estate projects. Borrowers enjoy flexible terms, fast closing, and competitive interest rates, while also offering the option to defer payment to the end of the loan term, rather than paying on a monthly basis.
To learn more about borrowing with GROUNDFLOOR, we invite you to visit our website and fill out our initial rate quote form in just a few minutes.
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