A Guide To Understand Hard Money Loan

Posted by Corie on April 27th, 2021

It is common knowledge that no everyone can apply for traditional loans. Credit unions and banks verify background and credit check. After processing these requirements, the loan request is evaluated. Only then is it decided that the applicant is worthy of a loan or not. In simpler words, credit unions and banks look for trustworthy individuals to lend. Trustworthiness is directly linked to creditworthiness.

There can be a number of reasons that can render someone unfit for the loan due to their bad credit. So what options these people have? Let’s try and find out in this blog.

However, on the flip side, some people don’t like the idea of traditional loans and the process that follows. These people may be investors, house-flippers, and even developers. Again, the question is, what do they do if they don’t like or aren’t eligible for a traditional loan? This is where the residential and commercial hard money lenders come in.

What Does Hard Money Loan Actually Mean?

Third-party investors usually lend it to the business or any individual. This loan is not backed up via the recipient’s credit; on the contrary, it is leaned against physical assets. To make it more simple, here is an example; the lender will provide a loan against the value of the property rather than going into the individual’s background and credit score.

Real estate is the most known for the backing of hard money loans, but other physical assets work also.

How does It work?

If you talk about it and one of your friends suggests against it, it will be understandable because it does have a bad reputation. The most common fear that stigmatized this type of loan is the fear of neighborhood mob as people assume they hand out the money, and it comes with severe repercussions if you fail to pay.

However, in the financial world, the notion is often laughed at. A hard money loan is simply an alternative executed outside of the traditional loan. It can provide any individual, investor, or real estate developer with capital. The process of how it works is as follows:

Valuation

When a lender is contacted, and the required amount is coveted, evaluation of assets and investment opportunities are gauged. If a business or individual who has applied for the loan is found eligible, a lending value is set. This lending value is set against the total value of assets owned or to be purchased by the applicant. The lending value is always less than the actual real value.

Interest And Fees

Once both parties are settled on the lending value, the lender sets an interest rate and fees. It is a rule of thumb that when it comes to hard money loans, the fees and interest are always higher. the general breakdown is like this:

12% to 21% annual interest and 2% to 5% processing fees. The processing fee is mostly required before the loan issues.

Time It Takes

It varies from situation to situation and case to case. Typically, it needs to be paid within six months to 12 months. The processing speed is the most significant advantage of these loans as they are processed quickly. The common interest and fees would not worth it if the loan is not processed speedily.

It can take three days to a month to be processed, but the average time is one week. These loans may have higher interest and fees, but less paperwork and downtime means seizing an opportunity that is right in front of them for many. Hard money loans are pretty standard among estate investors.