A hard money loan is a type of loan that gives the borrower funds in exchange for assets in the form of property. These assets can vary but can include real estate property. Hard money loans differ from standard loans in that the lender loans money based on the value of the asset instead of the borrower’s credit score. There are specific uses for hard loans, as well as associated risks and benefits.
Hard money loans have become more common in recent times due to difficulty of obtaining traditional loans as a result of lack of traditional bank lenders and stricter monitoring of credit scores. However, hard money loans are not necessarily easy to find, as they entail proper networking on the borrower’s part, and a good reputation for prior similar transactions. Hard money loans are typically attractive to individuals with back credit scores, lack of a W-2 income statement, history of foreclosures, or property that needs repair. For this reason, hard money loans are used commonly in the real estate market for investors needing to make home improvements or repositioning, as they are easier to obtain. They are also attractive to home mortgagers who have exceeded the number of mortgages possible on a current home. In general, hard money loans can be obtained more quickly because of the lack of credit score and bank statement review, but instead more emphasis on the collateral value. The restrictions on collateral loans are far less, and the terms in which they can be paid back are more flexible.
In general, hard money loans carry more risk to the lender because the lender does not have a history of the borrower’s credibility in paying loans. A credit score explains the borrower’s history of paying back loans, but without a credit score the hard money lender has nothing to go off and is solely basing the loan off of the collateral value of the hard asset. For this reason, interest rates for hard money loans are higher than traditional bank loans. Hard money loans are risky for the lender, but loaners can reduce risk by having a good knowledge of the market in which they practice. A second way to reduce risk is to ensure that the borrower has a stake in the project for which the loan is being applied to. For instance, if the borrower is trying to repair a home with the loan, the lender can reduce his own risk if the borrower owns the home since the borrower will have a higher incentive to finish the project and pay back the loan. A third way to reduce risk is to ensure that the borrower has a good history of finishing the type of projects he is undertaking with the loan. Finally, the borrower needs to have a plan as to how the project will be undertaken and how the loan will be paid back. If these steps are carried out, the lender and borrower can increase the chances of a successful hard money loan.