Hard Money Loans Explained: The Basics and How To Qualify
Until you find yourself in a situation where you are facing an unforeseen circumstance or a sudden expense, you will probably never fully understand how hard it can be to quickly obtain access to cash. After all, if you do not have a nearly perfect credit history with a good income-to-debt ratio, getting approved for a short-notice loan can be borderline impossible. Thus, you should learn some of the most common alternatives that have helped millions of Americans overcome these types of problems as they continue to strive toward financial freedom. One of the solutions that are rapidly growing in popularity are the so-called “hard money loans.” Unlike their traditional counterparts provided by commercial banks and other enormous institutions, these loans have a completely different set of requirements. Hence why folks who may have to overcome some extenuating circumstances may decide to go this route. To understand the entire process a little better, however, let us briefly explain what exactly hard loans are.
What Are Hard Money Loans?
A hard money loan is a fixed line of credit that is backed up by some collateral. That collateral is an asset owned by the borrower who is willing to lose it if they fail to make timely payments. So, essentially, the lender is giving out a certain amount of cash under the promise to receive the title to the collateral if the other party defaults.
Given this model of liability, the entire process is different than typical loans like mortgages. First, the creditworthiness of the person who is asking for the cash is seldom given much attention, if any. The reason why is that the lender does not necessarily care about someone’s prior track record of making timely payments on things. Instead, they are simply focused on the overall value of the asset that is collateral.
For example, if someone borrows $10,000 and puts a $14,000 vehicle as their collateral, the lender would earn a substantial amount of profit in a situation where the loan is not paid back on time. Of course, this is not the goal of any lender as the timeline and legalities to actually get a hold of the asset can be quite extensive. Nonetheless, it is a form of a back up that makes them less tolerable to someone’s poor credit history or a complete lack thereof.
When Should You Consider a Hard Money Loan?
Since hard money loans require you to place some asset as collateral, they should never be used as just another alternative to get you from point A to point B. On the contrary, given the risk that you may lose ownership of something, you should only seek hard loans if you have no other way to meet your obligations without going bankrupt or missing out on a great transaction. For instance, a lot of real estate investors utilize these types of transactions when they are anticipating a big sale and need some cash in the meantime. Once they make that sale, however, they immediately pay back the hard money loan, thus, avoiding the risk of losing the property encumbered by that liability.
The Advantages and Risks
The most obvious advantage of a hard money loan is the fact that you will be able to get around your credit history, regardless of how poor it may be. Obviously, if you have an extremely bad spending track record, you could face some obstacles. Those types of situations are quite uncommon, though, as the vast majority of investors who give out hard loans only focus on the value of the collateral.
Another upside is that you are not dealing with large banks or commercial finance institutions like credit unions. Instead, you will interact with individuals or businesses who give out these loans as a part of their investment portfolio. For them, hard loans are another way to diversify their assets by bringing in your interest payments with the potential to take ownership of your asset that is on the line. This translates to a noticeable shorter process and much less paperwork. Unlike banks that have endless applications and screening procedures, the only thing that you will need to spend time on to get a hard loan is proving the value of your collateral.
As far as the risks associated with a hard loan, the main one is the chance that you may lose your car, house, or whatever item you place as collateral. Since the value will be above the overall loan amount, you would technically also be in a loss as if you sold something for less than its market price. So, if you intend on taking this route, you should prepare to face a considerable amount of pressure to meet your financial deadlines.
How to Get Started and Qualify?
In case you would like to proceed and apply for a hard money loan, the best starting point will be online research. Nowadays, nearly all investors and companies who offer these services are accessible via the internet where you can find reviews from other customers and compare offers from different providers. That means that you should begin looking into entities that operate in this sphere within your area and think about scheduling some face-to-face meetings to get a sense of what the lender is expecting.
Getting in touch with a professional financial planner would also be a great idea as you want to make sure that someone who understands the finance language glances over the contract that you sign. Albeit somewhat straightforward, there is a very good chance that you will have to deal with a plethora of clauses written in legalese that may sound completely foreign to you. To avoid unnecessary risks associated with misinterpretation, it is always good to have an experienced individual look through everything as well.
Finally, regardless of how urgent your need for cash is, you should never settle for the first offer that you receive nor let the lender know that you are struggling. Doing so will give them more leverage to charge higher interest rates or shorten your payback periods, which increases that chance of you losing your collateral. Try a few of the most reputable sources to ensure that you are entering into the most fitting contract. Therefore, get your computers ready and start searching as soon as possible!
Associates Home Loan of Florida can guide you through the lending process! Apply Now or Call us today at (813) 328-3632.