It’s a buzz kill when a business deal is almost sealed, but there are no finances to put on the final stamp of the agreement. In cases like that, you’d probably rush to the bank to secure a loan that can drive things further. The only catch is that getting a loan from traditional lenders can be a painfully slow process.
On top of that, if you don’t have a clean slate for responsibly borrowing and returning the money, then the no-loan-for-you situation can jeopardize your deal. However, there’s always a silver lining to the borrowing cloud because you can attain a hard money loan to rescue you from circumstances.
So, let’s dig into what hard money loans are and how they can help your real estate business.
What is a hard money loan?
First things first, a hard money loan is not the kind of loan that you get from a bank. It comes from hard money lenders that may be an individual or a group of people who provide loans.
These loans are typically issued quickly, don’t demand extensive paperwork or background checks, and are short-lived. A conventional lender looks at numerous factors before funding you. For instance, they need to have their eyeballs on your credit source, your income to evaluate your ability to repay the loan, and your borrowing history.
All these evaluations take time, which only a person who is in no rush for getting the loan has. In a fast-paced line of work such as the real estate field, getting such a traditional loan can be time-consuming.
You don’t get a hard money loan for free though. You get it at the temporary cost of collateral that secures your loan for you. It is commonplace for properties to serve as collaterals. If you fail to repay the loan in the set time, the hard moneylender takes the collateral to get his money back.
Another interesting aspect about hard money loans is that they have a short life. The duration of such loans can range anywhere between three months to three years. It can also fly up to five years at most.
There is another vital factor in hard money loans though. And, it’s that these loans tend to come at a higher interest rate. Moreover, most lenders keep the loan-to-value ratio (LTV ratio) low. This ratio may lie anywhere between 50-70%.
This is a measure lender take to ensure that they can sell the collateral quickly and at a good price if you face any troubles in paying back the loan. Although there is a bit of risk involved in getting hard money loans, you won’t encounter any problem if you work with a reputable name such as Longhorn Investments.
How are hard money loans essential for real estate businesses?
Real estate businesses demand quick decisions and even quicker cash exchanges. Naturally, you need the cash to buy properties before you can sell them. And the bridge that executes this buying and selling part is a loan.
Since banks prefer the snail’s pace for granting loans, hard money lenders automatically become the knights that save your day. They have a healthy appetite for risks. Such lenders don’t pay much attention to the typical scores and the history that conventional lenders survey.
Their only focus is the property that you are ready to put on hold for paying back the loan that you’re taking in case you fail to pay back in cash. This makes matters simple and quick for real estate ventures. You don’t have to wait for loan approval or get tons of documents checked.
You only have to put the collateral on the line. Another essential pointer is that the real estate work moves at a substantial pace. Properties are the chief medium of exchange for them. Hence, you don’t need loans for long timeframes.
You can easily pay them off. Hard money loans also align with these borrowing aims for real estate workers. The lifeline of a hard money loan is no more than five years, which suits the preferences of the borrowers.
Real estate investors can also get the money on properties that aren’t completely ready. In that case, the amount of the loan finalized sums up to the worth of the property after the renovations. This is what is known as the “after repair value”. Irrespective of how fast the rehabilitation work is completed or isn’t done, you will have to pay the borrower in time.
Take home message
Getting approved for a bank loan can be an utterly slow process. In some instances, it may even be impossible to get a loan if your record isn’t crystal clear. A hard money loan can help you out of the dead end as it pays more attention to the collateral’s value than your loan repayment history.