The Pros and Cons of Hard Money

Hard Money Loans are the alternative financing option to a traditional loan

Hard Money Loans are quick and easy, essential qualities many Real Estate Investors are forever drawn to hard money and build relationships with hard money lenders. Hard Money Loans are not only for real estate investors, though. Traditional family home buyers may also opt for hard money in their transactions under the right circumstances.

Borrowers used to traditional lending may find hard money loans very different. Differing approaches to loan evaluation and credit terms and conditions separate Traditional Loans from Hard Money loans. Highly favored by real estate investors, hard money loans are quick in fund releases. The need to close deals as quickly as possible secures the property for the investors. Hard Money Loans enhance investment opportunities since sellers usually treat them as “cash.” They do not have pre-conditions which may complicate a real estate deal transaction.   

Traditional loans, on the other hand, can drag on for weeks. Loan evaluation depends much on the various documents you are required to submit. Your credit rating also influences the outcome of your application crucially. Traditional loans are mostly long-term loans that cater to the financing needs of home buyers, especially those whose real estate property is owner-occupied.

The Pros and Cons of Hard Money

A Hard Money Loan may not be for everyone or the home buyers in the industry. However, there are advantages these kinds of loans have over traditional loans. You will find a hard money loan suitable to your current need if the following scenarios apply to you:

1. You require immediate funding to close a deal.
2. You do not qualify for a traditional or a commercial real estate loan because of your credit score.
3. You do not qualify for a mortgage because of income requirements.
4. The property you wish to buy is in disrepair.

Here are the pros and cons of hard money loans you should consider before deciding on your next phase as a real estate investor.

Hard Money Lender and Hard Money Loan Pros

1. Hard Money Loans are fast. Hard money Lenders take pride in being able to release funding within 15 days. Some even promise releases in as fast as one week. Thus, enabling investors to close on their targeted real estate deals.
2. Hard Money Loans are Asset-Based. Being asset-based means that hard money lenders evaluate the potential profitability of the loan with a primary focus on your collateral. Your credit score and financial situation are not primary factors for assessing hard money loan applications.
3. You can use Hard Money Loans to purchase dilapidated properties that Traditional Banks tend to decline. Banks’ appraisal derives from the current state of a real estate property. Thus, a property needing rehabilitation is not traditionally acceptable. Hard Money Lenders evaluate the potential of the real estate property, whether you will flip it or rent it.
4. Hard Money Lenders are Flexible. Being localized financial institutions, they have no constraints from policies imposed by central and national headquarters. Traditional banks usually have firm company policies their branches adhere to that any deviations need further approval from their bosses, lengthening the loan process. Most Hard Money Lenders have no strict centralized company policies making them more flexible in dealing with the needs of their borrowers. 
5. Building Long Term Relationships with Hard Money Lenders gives you benefits you will not enjoy with traditional banks. A history of multiple accounts and excellent repayment records can be your ticket to preferential or discounted interest rates or faster processing times. 
6. Hard Money Lenders can even give you free consultations. They want you to succeed and be your partner. A hard money lender operating for decades in a particular area has valuable information regarding real estate investments because of their experience in the field. You can talk to them about your deal. Many of them will be more than happy to do so.
7. You can ask for a waiver on prepayment penalties on your hard money loans, leaving you with more funds for your next project.
8. Hard Money Loans do not reflect on your Credit Report. Hence, your hard money loans do not affect your credit score. However, they may appear on background checks.  
9. Hard Money Loans can be as good as Cash. There are no pre-conditions on your loans which can include, among others, an appraisal report or your capacity to pay. Sellers will most likely favor Hard Money Loans compared to Traditional Loans. 

Hard Money Loan Cons

1. Higher Interest Rates. Hard Money Loans take in more risks than traditional or commercial real estate loans. Thus, Hard Money Lender Fees or Interest rates are higher than those of these banks. Hard Money Loans usually come with interest rates that range from 7% to 12% per year.
2. Hard Money Loans are Short-Term. The typical hard money loan only has terms not exceeding 36 months. Most rehabbers, however, prefer terms between 18 and 24 months. 
3. Downpayment Requirement. Many lenders prefer loans where the borrower inputs substantial equity investments on the property. Some can be as high as 30% of the value, meaning their LTV only goes to a maximum of 70%.
4. Hard Money Lender Fees. Origination Fees are charged outright from the borrower. These fees are usually from 3% to 5% of the loan amount. If a borrower extends the loan beyond the contract, the lender shall require the payment of Extension Fees. This scenario usually happens if the property remains unsold within the loan term or an exit strategy fails to materialize. We discuss more details about hard money loan fees here. 
5. An exit strategy formulated into the equation will help before you dive into a real estate investment deal. Exit strategies vary depending on the purpose of your loan. For instance, if you flip properties, you should be able to finish the rehab within a reasonable time so you can show it to as many buyers as possible. If you are into rentals, you should be able to secure a long-term loan from traditional banks to pay off your hard money loan.

Taking Advantage of Hard Money Loans, Our Final Take

In real estate investing, the advantages of hard money loans allow many investors to close deals in ways traditional loans fail to provide. Whether you plan a rental or a fix-and-flip, hard money loans can help secure your real estate deal. In the real estate investment industry, hard money advantages far outweigh its disadvantages. Hard Money Loans help you make real estate investments, build your portfolio at your own pace, and achieve the financial freedom you deserve. 

Why not make your dream a reality now? GL&L Holdings will help you in this journey. Call us now at (832) 770-9415 or send an email to info@gllholdings.com. Let us be your partners towards financial freedom.