The term “hard money loan” was coined in the 1950s, when the US credit industry went through some drastic changes.
Simply put, a hard money loan can be described as a short-term loan that’s secured by real estate
For years, it was considered the last resort for investors who were in a tough spot, so they had to seek capital against their property—but things are changing.
Hard money loans provide tons of benefits to investors who are seeking short-term financing, and people are realizing that. Hence, they are now giving hard money loans precedence over conventional loans.
But there are still many confusions floating around related to hard money loans that prevent investors from harnessing their true potential
In this article, we’ll discuss three important facts you probably didn’t know about hard money loans:
Fact#1: Hard money loans aren’t just for flipping properties
Investors who flip properties find hard money loans to be the perfect choice for financing their projects, because of the faster processing time and more flexible terms, among other benefits.
READ: How House Flipping Works
However, hard money loans aren’t just for property flippers; they can be beneficial for financing several types of commercial projects.
In fact, a hard money loan is a great option for large development projects where investors often need quick funding to meet short-term financial needs.
Moreover, it can be a lifesaver for investors who are facing a financial crunch and need financing on a temporary basis.
Fact#2: Hard money loans and bridge loans aren’t the same
Some investors use the terms hard money loans and bridge loans interchangeably, but the terms don’t necessarily represent the same thing.
Bridge loans are taken out specifically to meet temporary financing needs to successfully carry out real estate transactions.
On the other hand, hard money loans are used for numerous reasons, like dealing with bankruptcy, foreclosure, or delinquent mortgages.
Moreover, they’re also a great way to obtain quick financing to take advantage of a real estate opportunity.
Fact#3: The credit rating doesn’t matter, but the loan-to-value ratio does!
Hard money lenders don’t care about the borrower’s credit ratings. However, they are interested in the loan-to-value ratio.
Many lenders will lend anywhere between 65–75 percent of the value of the property.
READ: Loan to Value Ratio – Definition and Calculation
Some lenders, however, lend based on the after repair value (ARV), which represents the estimated value of the property after improvements or upgrades are carried out.
This increases risk and causes the lender to charge a higher rate of interest.
That being said, hard money loans offer several benefits over traditional lending, which totally makes them worth paying some extra money for.
Global Capital Partners Fund LLC is a leading private lending firm in NY that provides hard money loans at competitive prices and flexible terms. The company offers a wide range of commercial real estate financing solutions, including asset-based lending, mezzanine financing, and more. Call at +1-800-514-7350 for more details.