What You Need To Know About Hard Money Loans
Traditional mortgage lenders can be a drag, with many hoops to jump through and lots of time spent waiting. Fortunately, there is a way to get around borrowing from traditional mortgage lenders when looking to finance a house. Hard money lenders are individuals that won’t care about your credit scores or other financial information, and will instead loan on the basis of the property’s value. For those that are having a hard time securing a loan through more traditional methods, hard money lenders may be your best bet to secure a loan and your dream house. However, hard money loans aren’t perfect, and there are many things that you should be aware of before signing off on one. Here’s everything you need to know about hard money loans.
What Are They?
Hard money loans aren’t your traditional way of acquiring money. Hard money lenders don’t care about your traditional financial information such as credit score or ability to pay the loan back, but are instead more concerned with the property’s value. These lenders will use your property as collateral, meaning that if you are unable to pay them back, then they will just use your property as payment. After they take your property, they will sell it in order to make their money from their loan back. The more money the property is worth, the more money a hard money lender will make if they take the property as collateral and sell it. This is why hard money lenders will be much more concerned with the value of the property you are trying to secure a loan for than your financial information.
The biggest benefit of hard money loans is it allows those with poor financial history to secure a loan when they typically wouldn’t be able to. Many people had financial struggles when they first left school or entered the workforce, and these struggles still haunt them today. Their financial situation may have changed for the better, but their financial history and credit scores may not reflect this yet. For these people, hard money lenders may be the best bet in securing a loan. In addition, hard money loans typically go through at a much faster pace than typical loans. Lenders aren’t concerned with your financial documents and history, meaning the process is much smoother and quicker. This allows you to secure a loan much faster if you are on a time constraint.
Risks and Drawbacks
Even though hard money loans sound good, there are still obvious major risks associated with them. The biggest risk is being unable to pay the loans back and losing your new property as collateral damage. If you’re not careful with your finances then this is a very real possibility. Hard money lenders don’t care about your financial information or whether or not you can pay them back, so their vetting process is much more lax. This means that lower income individuals may be able to purchase homes that are outside of their budget. For example, a lower income family could be looking for Virginia real estate in an upper-class neighborhood. The property value is likely high, meaning it is attractive for a hard money lender. However, just because an individual could secure a loan, that doesn’t mean they should. No one should ever take on debt that they are unprepared or unable to pay back. These risks don’t even factor in the fact that hard money lenders are typically hard to find since they are individual investors. In addition, hard money lenders have a reputation of being a little more untrustworthy and unfair than traditional banks since they are not usually tied to any particular financial institution.