Hard money loans are short-term bridging loans that are ideal for low-credit borrowers, entrepreneurs without proven experience and other people who want to purchase real estate for business purposes.
What is a hard money business loan?
A hard money loan is a type of secured loan secured by real estate assets. Borrowers with the necessary collateral can receive hard money loans, even if they have a poor credit rating or little time in business. Hard money loans are often considered a kind of bridging loan.
Strange as it may sound, hard money lenders southern california do not expect you to be able to repay your loan, which is why your creditworthiness is unlikely to play such a big role. Your loan will be primarily based on the value of your collateral. If you cannot repay your loan, the lender will take possession of the property you used as collateral.
How do hard money loans work?
Hard money loans are similar to other high-yield short- or medium-term loans.
Most hard money loans for companies have a term of less than one year, although longer loans can last up to five years. In general, interest rates are somewhere between 9% and 21%.
Since every hard money loan is unique, the exact conditions depend on the deal you have concluded with your hard money lender, the region in which you buy and the mortgage lending phase (LTV). In general, every point charged on your hard money loan corresponds to 1% of the loan amount.
For example, if you borrow $100,000 and your hard money lender charges you four points, your fees amount to $4,000. The points are paid in advance and offer the lender a certain return in case you repay your loan early.
At the same time, this type of loan is pretty similar to a loan with traditional terms. Your loan will accumulate interest over time. Usually you pay monthly to get your loan closed. Ideally, you pay off your hard money loan early before the high interest rates apply. Since this is expected, there are rarely penalties for the early repayment of your hard money loan.
Renting out the property is another common strategy.
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Advantages of hard money loans are:
- Fast approval: If you bypass the Byzantine approval processes of the banks, you usually save time. This can be particularly useful in competitive real estate markets, where you have to anticipate other buyers.
- Flexibility: If you invest in real estate, a hard money lender could have more understanding for your fixed-and-flip strategy than a bank.
- Negotiable: Hard money lenders can, at least theoretically, be negotiated in a way that banks cannot.
- Poor creditworthiness is not disqualifying: As long as you have a good plan and equity and can prove your real estate experience, a bad loan will probably not exclude you from the hard money scene.
Hard money loans demand you to be careful
As is often the case with innovative, unregulated financial areas, you should fulfill your duty of care before embarking on a business.
Since there are not many regulatory systems, the hard money credit sector is an ideal environment for predatory loans. It is best to have a lawyer who is familiar with hard money contracts review your offer and ensure that your interests are represented.
The disadvantages of a hard money loan are:
- High interest rates: Interest rates on hard money loans can easily rise to the high tens and sometimes even higher.
- Loan fees: These would be comparable to the processing fee of a normal loan, but they are usually much higher and typically range from 2% to 10% of the loan amount.
- Deposit: Hard money loans usually cover a maximum of 75% of the cost of the property.