Did you know that 108 million Americans do not have a credit score? Unfortunately, this makes up about 16% of the United States population.
If you are in this demographic, accessing a house or car loan can be impossible. However, this shouldn’t deter you from investing in real estate. Moreover, you will struggle to compete with cash buyers if you depend on a traditional loan to buy a property.
The good news is that working with hard money lenders will ensure that you get a loan fast. And as a result, you can pursue your real estate investment in good time.
So, who are hard money lenders, and what are their pros and cons? This piece will answer these questions exhaustively.
What Is a Hard Money Loan?
A hard money loan is an easily accessible short-term loan that you secure by use of a property as collateral. Most people consider it a last resort. And they are more inclined to use it because the lenders process it in about 15 days.
Hard money loans are popular in real estate. And investors prefer to obtain funds from hard money lenders. Usually, these lenders are a group of high-net individuals or private lending institutions.
You cannot find the kind of financial products they offer from your local bank. Besides that, there are different types of lenders. These include real estate offices, mortgage funds, high-net-worth individuals, and fix & flips funds.
Nonetheless, you must evaluate your lender options carefully if you opt for a hard money loan.
Pros of Hard Money Lenders
There are many reasons why a hard money lender could be the best financial partner for your real estate project. Here are the pros of hard money loans;
Fast and Easy to Process
Unlike traditional financing institutions, hard money lenders will not spend days scrutinizing your credit scores. They look at your property, which acts as collateral, and lend you the money. Typically, this process only takes 10 to 20 days.
Lend on Property that Needs Fix-Ups
Your local bank may have reservations about lending you money against a property that is in poor condition. Conversely, hard money lenders are not concerned about such issues. They will approve your loan even if the property requires substantial repairs.
Do Not Require a Perfect Credit Score
Accessing a loan facility can be impossible if your credit score is not great. However, hard money lenders do not require a perfect credit score. So long as you are not on the brink of bankruptcy, they will gladly approve your loan.
Hard money lenders undoubtedly have more flexible terms than their traditional counterparts. For example, they will not scrutinize your job history to approve your loan. Their underwriting process is not as limiting and rigorous as traditional lenders.
Furthermore, you don’t need to worry about your debt-to-income ratio because it will not matter. And hard money lenders’ agreements are not as complex as those of traditional institutions.
Cons of Hard Money Lenders
While hard money lenders may seem like the most ideal money lenders, they also have their disadvantages. Here are some of them:
One of the cons of hard money lenders is the high interest on their loan products. The hard money loan interest will fall between 9-15%. On top of that, the lender may require a loan origination fee.
As a borrower, these interests are risky, especially if you default on the payments. You could lose your property or even pay outrageous interest rates throughout the loan.
Another challenge with hard money lenders is the down payment. To access this facility, you must raise about 25% to 30% to make a down payment on the property.
Depending on the property’s value, this could be a substantial amount of money. If you have not saved enough, you will struggle to raise the down payment. Moreover, without the upfront payment, you will not get a loan.
Your local bank will take as low as a 20% down payment to process your loan.
The Risk of Foreclosure
Regardless of who is lending you the money, you will have to contend with the risk of foreclosure.
For example, if you fail to repair the property, pay the loan, or pay interest, you will face foreclosure. Nonetheless, if your project is not moving according to plan, you should inform the lender. Failure to do that, the risk of foreclosure will double.
You may also not like that hard money lenders will only give you a short-term loan. For instance, most private lenders will offer a maximum repayment period of 3 years. You might struggle to honor payments if you borrow a significant amount.
Typically, a hard money lender will give you a 12-month loan.
You must repair your property, sell it, and pay the loan in 12 months. Unfortunately, this gamble may fail to pay off. If an unforeseen event gets in the way of your project, your only option will be to request a loan extension.
Hard money lenders have no issues with giving borrowers an extension. However, there is a caveat. A loan extension will come with several consequences.
Your lender will charge a loan extension fee or increase the monthly interest on the facility. For these reasons, you need to be cautious when choosing a lender.
Partner With the Right Hard Money Lenders
If you are worried about your credit score, job history, or debt-to-income ratio, hard money lenders are your next best option.
Do not give up on your real estate project because your local bank cannot approve your loan. Instead, consider partnering with hard money lenders.
Are you in need of a real estate loan? We are an alternative investment group that prides itself in working with people like you. Although we offer a wide range of financial products, our primary focus is real estate lending.
Contact us today to learn more about our hard money loan products. And we will be delighted to partner with you.