Hard money loans used to evoke negative connotations. But in reality, a hard money loan is nothing to be afraid of as long as you understand how it works and how to move the process along so that your loan does not fall through at the last minute. Hard money lenders move faster and assume a larger risk than banks typically do, opening up exciting opportunities for new and seasoned investors alike.
How a Hard Money Loan Works
Hard money loans are typically short-term loans lasting from one to five years, which actually works in the borrower’s favor because the shorter the loan, the sooner they settle up and stop paying interest.
To secure a hard money loan, the borrower designates a collateral property. This allows the lender to move forward with less concern as to whether the borrower will be able to repay the loan. However, that doesn’t mean that hard money lenders are out to set you up for property loss. They want the loan to be successful just like you do. Being repaid is much easier than seizing and selling a property.
“Going after collateral is really a last resort,” says Edwin Urrego, Senior Director at Kennedy Funding Financial. “Since we are lending large amounts of money that banks won’t, the collateral helps us identify savvy borrowers who intend to use their loan to achieve their financial goals. Ask any serious investor, and they will tell you that being debt-free is one of those goals.”
Mistakes and Misconceptions
Hard money loans are designed to get you the funding you need fast, at a higher loan-to-value ratio and with greater flexibility than most other types of loans. However, since you are securing the loan with collateral real estate, there are many factors that come into play, such as:
- Land Use
These issues have the potential to clog the approval process or halt it altogether, leaving both the borrower and the lender unhappy. If you are seeking a hard money loan, it’s beneficial to complete due diligence on your collateral property before engaging a lender in order to avoid wasted time.
Hard money loans have higher interest rates because they are approved faster and more frequently in situations where banks typically balk. A hard money loan is ideal for a land loan, construction loan, or for a borrower with credit issues.
When you work with a reputable private lender like Kennedy Funding Financial, it becomes clear that hard money loans are indeed a positive alternative to bank loans. Just remember that although there is less paperwork involved and your loan can be approved within a week, you should still have all of your ducks in a row beforehand. If you go into the process with clear, accurate documentation of the bullet points above, you will give yourself the best chance at securing your loan quickly and moving forward with your investment.