There are some people who will never need to borrow against any property they own or finance a property they are planning to purchase with a hard money loan. This can be attributed to great credit and great income levels or never having the need to “get the money fast” due to circumstances requiring urgency or immediacy.
Then there are people that don’t have perfect credit or those that don’t have the monthly income needed to satisfy the typical approval profile of the big banks or institutional lenders. Their alternative is to seek a hard money loan.
What is a Hard Money Loan?
A hard money loan is an asset-based loan meaning the collateral for the loan is an asset, typically a property. A hard money loan is issued to borrowers who cannot qualify for a bank and/or institutional loan because of poor credit scores or lower-than-accepted monthly income levels. Hard money lenders, like Westar Financial Group, fill the void and are there to help with the assistance of private investors and private investment companies by their side.
While the interest rate and mortgage loan costs are typically higher for hard money loans (because of the higher risk involved in financing the loan) many of the negatives associated with them are offset with the benefits attributed to the use of the money borrowed.
The Benefits of Hard Money Loans Come From What You Do With The Money Borrowed
Loaned money can be used for most any purpose such as paying off higher interest rate loans or credit cards. Paying off a higher rate with a lower rate will save money. That’s easy to understand. Other benefits include starting a business or investing in additional real estate. If the business is successful or the investment property goes up in value or provides positive monthly cash flow then the use of a hard money loan has benefited the borrower.
Then there are those situations where the benefit is simply the receipt of the money needed to pay obligations or supplement living expenses when life gets a little rough. The use of a hard money loan to fill a money gap in life should only be considered as a short term solution since there is a monthly interest payment due that just might become an additional financial burden if monthly income is not increased or augmented to offset the costs associated with the loan.
Interest Rates On Hard Money Loans
Interest rates on hard money loans can be up to 10% higher than the rates offered by banks or institutional real estate lenders so it is advised to use the proceeds of the loan prudently and carefully.
One of the situations where a hard money loan is currently employed is where active buyers of distressed properties simply do not have the luxury of time to get a bank loan or the banks are not lending on speculative real estate investments or where there exists more potential deals than money possessed by the interested buyer. So often a buyer will purchase property “A” for cash but then property “B” comes along and the buyer doesn’t have enough money to the buy it but there appears to be enough potential profit to justify any financing costs. So the buyer will typically borrow money on property “A” and use the proceeds to purchase property “B”. The profit derived from property “B” more than offsets the costs of money from the hard money loan.
If property buyers are successful in the home buying business, they will eventually accumulate more money as more deals are consummated so the need for hard money will decline as they become more successful.
But sometimes in life opportunities just keep coming in, so the funny thing about money is you just never have enough.