Why Do People Borrow From Hard Money Lenders
A common question I hear is why would a borrower ever borrow from a hard money lender, especially since hard money loans typically come with higher interest rates and fees than traditional bank loans. While hard money loans come with higher interest rates and fees, there are several reasons why someone might choose this option over a traditional bank loan.
Speed & Certainly of Execution
One of the main reasons people turn to hard money lenders is speed. Banks have strict lending criteria and require a lot of documentation before they will approve a loan. This can be a time-consuming process, and borrowers may need to wait weeks or even months to receive the funds they need. In contrast, hard money lenders can often provide funding within a few days, making them a good option for borrowers who need cash quickly. This is particularly true in the real estate industry, where investors may need to move quickly to secure a property.
Another advantage of hard money lenders is flexibility. Banks have strict guidelines for loan approval, and borrowers with less-than-perfect credit or other issues may find it difficult to qualify for a loan. Hard money lenders, on the other hand, are more willing to work with borrowers who don’t meet traditional lending criteria. This makes it easier for borrowers to get the funding they need, even if they have a blemished credit history or other challenges.
Credit Problems or Issues
Hard money loans are typically secured by real estate, which means that the borrower’s property serves as collateral. This can be an advantage for borrowers because it means that the lender has a stake in the success of the project. If the borrower defaults on the loan, the lender can seize the property to recoup their investment. This makes hard money loans less risky for lenders, which in turn makes them more likely to approve the loan. Borrowers benefit from this arrangement because they are more likely to get approved for a loan, even if they have a less-than-ideal credit history.
Unique Properties & Projects
Another advantage of hard money lenders is that they are often willing to lend on unique properties that traditional banks would not consider. For example, banks may be hesitant to lend on fix-and-flip projects or rural homes. Hard money lenders, on the other hand, specialize in these types of loans and are more willing to take on the risk. This makes hard money loans a good option for borrowers who are looking to invest in unique properties.
The Interest Costs Are Secondary For Short-Term Loans
Most hard money loans are typically short-term loans, which means that they are designed to be paid back within a few months to a few years. This can be an advantage for borrowers who only need funding for a short-term project. For example, a real estate investor who is planning to buy and sell a property within a few months may not want to take out a long-term bank loan. A hard money loan can provide the funding needed to complete the project, without requiring the borrower to take on a long-term debt obligation.
The reasons listed above are some of the common reasons that someone would borrow from a hard money lender. However, investors should stay diligent and learn about the types of borrowers a lender works with before making any investment decisions.