Financial experts often portray hard money lending is a bad thing. It is described as a lending option of last resort for desperate people whose poor credit prevents them from getting traditional bank loans. But such a simple assessment of hard money is both misleading and inaccurate. Hard money lending is a good thing when used appropriately.
Salt Lake City’s Actium Partners is just one of an untold number of hard money lenders operating across the country. They focus primarily on real estate transactions in Utah, Colorado, and Idaho. They say the two most significant advantages hard money brings are speed and flexibility.
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Hard Money Equals Fast Funding
Most hard money loans are obtained for commercial real estate transactions. Furthermore, real estate investors turn to hard money because loans can be funded quickly. According to Actium, the average hard money loan can be approved, closed, and funded in a few business days.
This is a big deal to real estate investors. Things in the commercial property market tend to move very quickly. So quickly, in fact, that investors who have to wait on banks to get funding are more likely to lose out on the best deals. Sellers prefer to accept offers from buyers who can close quickly.
Flexible Lending Criteria
Hard money’s other big advantage is flexible lending criteria. Because hard money lending is based on asset value, lenders do not have to concern themselves about borrower income or credit. They make their approval decisions based on the value of the property being acquired.
The practical effect of this reality is that real estate investors don’t have to provide a ton of paperwork. They do not have to provide profit and loss statements, bank statements, tax records, etc. They don’t have to jump through hoops to provide a mountain of irrelevant documentation. As for credit score, it is a non-factor. It never even enters into the approval picture.
Interest Rates Are Higher
Hard money critics often point out that interest rates are higher compared to conventional financing. That much is true. Interest rates on hard money loans can be several percentage points higher depending on the lender. But focusing entirely on interest rates only accounts for half the equation. The other half is loan terms.
Loan terms are essentially the amount of time a borrower has to pay back a loan, governed by an agreed-upon payment schedule. Your typical hard money loan has terms of no more than 24 months. It is also fairly normal for monthly payments to be interest payments only. The borrower pays back the principal at loan maturity.
Shorter Terms Equal Lower Costs
Interest rates and terms work together to determine how much a borrower will pay for the privilege of borrowing. The longer the term, the more total interest paid over the life of the loan. If you do not believe that, find yourself a free, online amortization calculator. Run the numbers on different rate and term combinations and see what happens.
Although hard money loans carry higher interest rates, their shorter terms more than make up for it. A borrower will typically pay less total interest over two years on a hard money loan than would be paid over 15 or 20 years on a conventional loan. Loan terms make all the difference in the world.
The fact is that hard money loans are a good and viable funding option for certain types of borrowing needs. Despite what so many critics have to say about hard money lending, it is a good thing.