Pros and Cons of Hard Money Lending

by | May 25, 2022

Investors often look into various lending options when financing real estate investments and short-term projects. One option to consider if you’re looking for a real estate investment loan is a hard money loan. Understanding the meaning of hard money lending can help you determine if this is the right option for your financial situation. Review some of the benefits and drawbacks of working with a hard money lender.

What Is a Hard Money Loan?

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Before you consider the pros and cons of hard money lending, it’s helpful to know what a hard money loan is and the different types of hard money loans available to investors. The term refers to a loan provided by a nontraditional or private lender that is backed by a tangible asset. The most common example of a hard money loan is one given to a borrower to purchase a piece of real estate. The property serves as collateral for the loan, which reduces the risk for both parties.

A hard money loan is often used as a short-term financial solution when a borrower needs the funds quickly. Borrowers might consider hard money loans from private lenders when purchasing properties that they plan to flip and sell as soon as possible. If a real estate buyer can’t qualify for a traditional loan right away, a hard money loan might be an option as a short-term solution to secure financing until they can qualify. Investors frequently use hard money loans to purchase commercial or rental properties.

Types of Hard Money Loans

Several types of hard money loans are available to borrowers who meet the terms. A transactional hard money loan is a short-term loan used to finance the purchase of real estate. This loan type is frequently used by investors who plan to repair and sell a property right away. Its value is generally based on the estimated value of the property after it has been fixed up.

Another type of hard money loan is a bridge loan, which is a flexible solution to a buyer who might already own property. The loan serves as a bridge between the purchase of another property and your current property ownership, allowing you to buy the property quickly without waiting for another property to sell. A rental loan is an option for a real estate developer who needs quick access to funds or other resources when fixing up a property.

Pros and Cons of Hard Money Lending

With an understanding of hard money lending and the types of loans available, you can consider the pros and cons of hard money lending.

Pros of Hard Money Lending

One of the key advantages of hard money lending is the turnaround time, as this type of loan can typically be completed and funded much faster than a traditional loan. A hard money lender is generally more concerned about the collateral on the property than the borrower’s financial history or employment situation, so the process doesn’t usually require a thorough analysis of the borrower’s bank information, credit history, or tax forms. As a result, you can get the money you need to purchase real estate faster.

Flexibility is another key advantage of hard money lending. The process of taking out this type of loan doesn’t use the standard loan underwriting process, but allows each situation to be evaluated on a case-by-case basis. When requesting a hard money loan, you don’t work with a traditional lender with strict policies, but a private lender who can make decisions based on the property you plan to purchase. Hard money loans can also have flexible terms, including repayment schedules and durations.

Since a hard money loan doesn’t have strict terms like a traditional loan, certain penalties don’t apply. For example, if you pay off the loan before the end of the term, you won’t be subject to any prepayment penalties. You can often qualify for this type of loan regardless of your personal financial situation, as long as the property you plan to purchase can serve as collateral. The approval process is fast, which is important in a hot real estate market when properties sell quickly.

Cons of Hard Money Lending

Although hard money lending does offer advantages, it can also have a few drawbacks for some buyers. The interest rates on commercial loans, including hard money loans, tend to be higher than the rates that apply to traditional mortgage loans and other types of real estate loans. To qualify for a hard money loan, you’ll probably need to pay a portion of the property value as a down payment. Lenders typically require borrowers to put at least 20% of the purchase price down, which can be challenging for an investor buying a more expensive property.

Another con of hard money lending is the difficulty of obtaining an extension to the loan term. Many lenders offer a 12-month term on a hard money loan and extending that term might require the payment of an extension fee and an increase in the monthly payment amount. Failing to repay the loan in accordance with the terms can put the property into foreclosure or default, although a hard money lender might be more willing to work with the investor to finish the project rather than simply taking it back.

At Quick Lending, we make it easy to get the funds you need quickly and efficiently. We’re a boutique private lender that focuses on the needs of each individual client. Our financial professionals can cater to your individual situation and make decisions right away. We also have strong relationships with local vendors, which allows us to extend support and guidance to our valued clients. If you’re considering the pros and cons of hard money lending, allow our team to be part of the process and answer any questions you might have, as well as provide real, effective solutions.