Hard money is an alternate way to borrow money without going through traditional mortgage lenders. The majority of loans come from individuals (or investors). Hard money investors lend money to be used for collateral on a property.
Many people wonder what is hard money. Sometimes you need a loan quickly. Or at times where traditional lenders will not approve you for a loan—then this is your alternative option. However, it is important to know how these types of loans work.
What Is Hard Money?
The majority of loans require proof that you can repay them. Typically, lenders are interested in your credit scores and your income level. Credit scores and income level are a way for a lender to see your availability to repay a loan. However, if you have a reliable borrowing history and ability to repay a loan, you usually get approved. Using these items, a lender can look at your debt to income ratio.
If you have ever dealt with the process of getting approved by a traditional lender, you know that at times it can be a slow process. If you are an individual that has a high credit score and a substantial income—you still may have to go through this slow process. Having negative items on your credit reports delay the process. Also, the difficulty verifying your income can make the process longer. Leading to the potential for rejection.
How Is Hard Money Different?
Using a hard money lender is beneficial because they take a different approach. A hard money lender bases the potential of lending on collateral to secure the loan. The focus is not on the ability of repayment. Instead, more concern is for the value of your collateral. These types of loans are generally short-term loans. Lasting anywhere from one to five years depending on your lender.
Why Use Hard Money?
This type of loan is useful for certain borrowers who cannot obtain traditional funding when they need it most. Using hard money has its benefits–approval, the speed, and flexibility.
Approval. Since the most critical factor is collateral, if you are buying an investment property then the lender will provide you with an amount that is as much as the property is worth. It’s a pretty straightforward process. Also, beneficial for individuals who have a foreclosure or other negative items on their credit report because it is much less important. Also, typically the loan-to-value ratios (LTV ratios) are low.
Speed. Hard money loans close quickly in comparison to other loans. They focus on collateral instead of your financial position and don’t need to spend as much time going through your loan application and having to verify income etc. Build a relationship with a hard money lender because the process can move quickly and you can close deals that other’s can’t close.
Flexibility. Hard money lenders do not use a standardized underwriting process so agreements can be more flexible than traditional loan agreements. You also may be able to negotiate things easier– such as repayment schedules.
The loan process can be tricky. Connect with an Atlanta Private Lending expert. We are a Direct Hard Money Lender and have a clear understanding of underwriting and fast closings.