3 Advantages and Disadvantages of Hard Money Loans
A hard money loan is a short-term loan where a borrower receives funds secured by an asset, typically their property. Hard money loans do not take into consideration credit score or credit history. These loans are commonly one to five years, and if the borrower is not able to repay the loan, the lender seizes ownership of the asset. Hard money loans are most common in real estate investment.
The Advantages of a Hard Money Loan
- A Fast-Tracked Loan: Need money immediately? That is likely the top reason most people would consider a hard money loan. With this type of loan, individuals are usually approved in a single day. And the money can be funded within three to five business days. In comparison, a bank takes an average of 30-45 days from application to give out funding. As you are using assets, such as property, to secure the loan, the lender does not need to comb through your credit history to determine the likelihood of you paying back the loan.
- Few Requirements: Banks and credit unions often have strict regulations for acquiring a loan. If a bank sees a low credit score, a history of bankruptcies, or a foreclosure on your credit history, they will likely deny your loan. Banks also reject loans to some self-employed individuals or people who do not have two years of employment history in their current role. A hard loan only requires a few things: enough cash to make monthly payments, sufficient equity in the property and a sound exit strategy if one is needed.
- Approval for Projects Banks Won’t Finance: Banks will not lend loans that are for a short period of time. Banks are typically risk-averse, and short-term loans are at high risk. However, for those who are interested in a fix-and-flop loan, a 12-month period is ideal. A fix-and-flop loan is when a house that needs repair is purchased, fixed up and put back on the market within a short period of time. Banks will not grant this loan for potentially one of two reasons: the loan period is too short and they will not want to back a house that is in poor condition.
The Disadvantages of a Hard Money Loan
- High Interest: A hard loan’s biggest drawback is that the interest is typically significantly higher than a bank loan. The high-interest rate is due to the increased risk the lender has taken by not going through the borrower’s credit history. A hard loan can carry interest rates between 9 to 15%.
- Short Term: A hard loan is always on a short-term basis. Hard loans are granted between one to five years, but it is more typical for the loan to only be one or two years in length.
- High Down Payment Required: A hard money loan requires a down payment or equity between 25-30%. Again, this is required to reduce the risk on the lender.
Overall, a hard money loan can be a good option for those that are looking for a short-term loan and need the capital immediately. If you do take out a hard money loan, ensure that you are using a reputable and responsible agency. Wildcat Lending has an impeccable track record as a quality lender. Our loans are customized to each individual based on their needs. Our promise to you is that we close loans on time, every time. Contact us today at 214-308-2558 or at firstname.lastname@example.org.