Hard money lending refers to the practice of borrowing funds in the form of an asset, usually real estate, secured by a borrower’s mortgage. A hard money loan is generally a special type of unsecured loan-and is essentially a different kind of loan-using an asset as collateral. Unlike conventional loans, hard money loans are generally issued by commercial institutions or private individuals. Hard money lenders require a higher degree of collateral to obtain funding. To qualify for a hard money loan, borrowers need to have a viable business plan backed by substantial assets.
Many hard money lenders offer various types of loans. Each lender will have slightly different lending criteria, but most will be in operation for the same type of real estate. Typically, many hard money lenders are either investors trying to make a profit by providing capital to small businesses or individuals, or they are individual homeowners looking to borrow money to finance home improvements. They either originate the loan themselves or work for larger banks. Lenders also sometimes work for credit unions, other government institutions, or publicly traded corporations.
One of the primary purposes of the Hard Money Lenders is to provide short-term financing to borrowers with poor credit histories. In many instances, these lenders will purchase a property on behalf of a business or individual who lacks the necessary credit score to secure a traditional loan from a bank or other such institution. By putting forward the collateral of real estate, the hard money lenders can reduce the rate of interest they charge on this type of financing. However, they may still charge a higher interest rate than is offered by banks. Many times, however, hard money lenders will be willing to take an equal percentage of the loan from the borrower as payment of interest.
Commercial real estate investors have another use for hard money lenders. In many instances, they will seek to purchase commercial properties at an auction. This is where real estate investors can make a profit by purchasing property at prices that would not normally be available to individual buyers. Some hard money lenders even specialize in helping borrowers who need to purchase property for this type of venture. Some examples of this might be house flippers or investors who are interested in flipping a specific piece of real estate.
As mentioned above, some hard money loans may also be made directly to individual borrowers rather than larger companies. In these cases, the lenders are working for the borrowers and providing them the collateral they need to obtain the house or business they want. Typically, this type of lending is made to businesses that are already in operation, but some larger companies may also be able to obtain this type of financing without requiring collateral.
There are several disadvantages to working with these lenders beyond the fact that you usually do not receive the same interest rates as with traditional lenders. Usually, they require that borrowers pay back loans every month. Although it varies from company to company, they often require you to repay your loan within a year or two after the end of the term. While the terms of repayment are generally more rigid, they do provide some borrowers with an opportunity to quickly pay off their loans without having to worry about their credit rating.
There are, however, some cons to working with these lenders that you should be aware of before applying. Hard money lending is generally a higher risk than a traditional loan. Because the company uses your property as collateral, they take on a greater risk than a traditional loan would. Hard money lenders are also typically not willing to work with small business borrowers, which can be difficult for new ventures or existing businesses that have been established but are looking for more capital.
As with any loan, there are advantages and disadvantages. Hard money lending is not right for every borrower. If you do decide to work with one of these lenders, it is important to fully understand all of their terms and conditions. Make sure you can pay back your loan promptly, or else you will end up losing your collateral and your home. When looking for lenders, talk to friends, family members, and your local bank for suggestions as to who they recommend. They may have some experience with lending in this area and can assist you in finding the lender that best suits your needs.