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Hard Money Loan Definition and Everything Lenders Need To Know

Hard Money Loan Definition

Hard Money loans are an exchange of cash for secured high-stakes collateral. Typically these types of loans are backed by the real estate owned by the borrower. If you seek a hard money loan, you may put your home, investment property, or other property you put up for collateral. Hard money loans are typically sought by people in high-stakes businesses who need money fast but will be able to pay the money back within a few years. If you are down on your luck and your only collateral is your home in exchange for cash, a hard money loan will be a more significant risk for you since you have no way of paying it back.

What Is Hard Money?

The value of hard money is backed by gold or silver. Having money backed by something other than the trustworthiness of a paper dollar is helpful because currency rates can fluctuate from day to day on the global market.

Sometimes hard money can be supported by other things that have value, such as cryptocurrency. However, in the loan industry, hard money is typically backed by real estate because it’s a commodity that cannot be easily hidden away when the time comes to pay back the loan, and the borrower has no funds. But cars, boats, and even gold can be stashed away in other places, making it riskier for the lender.

Putting your real estate up for collateral in exchange for money is beneficial because you can access funds faster than you would with a traditional loan. The process is faster because the lender takes less risk with the loan. After all, it is secured. It is possible to see the money from a loan in your bank account within a week. These are very fast-paced loans, and you will benefit the most from taking one if you can pay it back within a year.

Do Hard Money Loans Require Good Credit?

Unlike traditional loans, most hard money loans do not focus on borrowers’ credit scores. Lenders can give loans to you if you have a lower credit score is because it is backed with another commodity besides a borrower’s reputation. That is not to say that a lender will completely disregard your reputation.

Most hard money lenders require a minimum credit score of 600 to discuss a hard money loan. In reference, a traditional loan requires a minimum score of at least 680 to obtain, and some banks require an even higher score.

Lenders can provide you with a hard money loan even though you have a lower credit score because these loans are secured. In fact, hard money loans can still be profitable for the lender even if you default on them. They are profitable is because of the collateral the lender receives and the upfront fees.

Interest Rates And Fees Of High Money Loans

Paying off your loan quickly is critical when taking out a hard money loan because these loans typically have high-interest rates. However, the interest rate can fluctuate throughout your loan period based on the risk the lender is taking. Your contract will illustrate the loan fluctuation plan. Interest rates are not the only fees you pay for taking out a high-stakes loan. You will also need to pay a:

  • Down payment
  • Processing fee
  • Underwriting fee

The down payment will vary from lender to lender. It is also based on the property type. If you use a residential property type for your loan, you can typically get a lower down payment. However, if you use a commercial property type, you will have a higher down payment.

Fortunately, you can negotiate the terms of your loan with your lender. Since these loans are based on real estate, the interest rates and other fees may differ from loan to loan based on the perceived risk of the collateral and borrower.

Who Needs A Hard Money Loan?

There are so many people who seek out a hard money loan each year. Whether you are a business owner who is down on your luck and needs money to make it until the next paycheck or you are in a high-stakes business, hard money loans are a hot commodity. Hard money loans typically deal with industries such as:

  • Flipping homes
  • Investment properties
  • Commercial properties

Traditional loans are harder to get for fast or risky transactions. For example, people in the home remodeling industry seek out hard money loans.

If you flip properties, you may seek hard money loans and use the property itself as collateral. Typically you can renovate and then resell the places quickly. As a property flipper, you will get your best value and pay the least interest on a hard money loan if you can pay it back within a year. It is possible to pay back a substantial loan in a year if you are a home flipper because you have large sums of money going in and out of your account from real estate sales. However, hard money loans are typically taken out and paid off in at least three years.

Advantages To A Hard Money Loan Over A Traditional Loan

Traditional lenders do not give hard money loans. One example of a conventional lender is a bank. If you need fast cash and have a low credit score, a bank is not the way to go. However, if your credit score is good, there are still disadvantages to going the traditional route for obtaining a loan:

  • It can take over 30 days
  • You need a higher credit score
  • The payments are set up for a longer time
  • Typically requires prior investment experience

Where To Get A Hard Money Loan

Hard money lenders are individuals or commercial investors, not banks. They typically deal in quick loans for riskier investment pursues and take real estate as the collateral. The lenders are not regulated as banks are, so they are free to make their own rules and investment decisions. Apply for Evansville, IN Commercial Hard Money Loans today to help your investment business succeed.

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