Hard money loans. We have all heard about them and how they are commonly called “The Last Resort Loan” or I like to say “Paying For A Flip with a Credit Card”. There are many pros and cons of working with some hard money lenders. Hard money lenders come in many different forms, some are companies and others just act as individuals loaning out there capital.
The beauty of leveraging hard money lenders are their flexibility they have in comparison to traditional banking institutions. Lending is primary based on property being used as collateral to secure payment of loan.
Some of the flexibility includes:
– Leniency on personal credit history
– Ready and available funds
– Loan is based on project
– Flexible repayment plans
– Quick application process
Now, there are downsides to acquiring a loan from a hard money lender. Typically, lenders give lower Loan-To-Value (LTV) ratios than traditional lending. It is common to see a LTV of 50% to 70% while, traditional lending typically loans 80%
to 97%, depending on lending structure.
Note: This is when a personal relationship with YOUR hard money lender can come in handy. I have seen, when there is a personal relationship developed and the lender trust your work they, typically, will lend more of the LTV.
Another downside of working with hard money lenders is that the interest rate is normally higher than any other loan types. Typically, the interest rates are higher by anywhere between 2 to 12%. This is why I like to say that, it is just like flipping on a credit card.
Now, another thing to keep in mind that this type of financing is supposed to be used as a short-term loan, typically 6 months to 3 year loan options. There are some restrictions that lenders will have on their loans such as, no owner-occupied loans due to various regulatory oversight and compliance rules.
Note: A lot of hard money lenders will value the property conservatively. Remember, they do not want to over lend. They want to insure that they can sell the property to make their money back, in a worse case scenario.
Hard money lending is a short-term options for investors to primarily flip properties. Loan and interest rates are all based on personal relationship and property value. Lending is computed conservatively however, they give first time flippers and people with bad personal credit history access to quick lump sums of cash.
Please consult your financial adviser and lender to see if this could be a great option for you and your project.