How Does a Hard Money Loan Work? Everything You Need to Know About Real Estate Investing
How Does a Hard Money Loan Work? Everything You Need to Know Here
Whether you’re in a tight financial spot, or if you’re looking to invest in your next big project – the same question remains. Where will you get the money that you need?
It doesn’t help that loans are confusing, lengthy, and complex processes. It can take months to secure a traditional financial loan. Yet, most other people aren’t aware that other kinds of loans that are there for when they need it.
Most people aren’t aware of them because they can also be confusing. Hard money loans aren’t like that. Just ask a lender, “how does a hard money loan work,” and you can start the process of securing a loan. They’re simple to take out and easy to understand.
If you need to get money as quickly as possible, keep reading below to learn about how hard loans work. They’re definitely one of your money options to consider as you try to secure a financial foothold.
Lenders Don’t Look At Credit – They Look At Collateral
The reason most traditional loans take so long to process is that the lender needs to know if they can trust you. They inspect your credit score and use it to determine more than just your financial situation. They also want to get a sense for your habits with money to determine if you can pay it back.
Learning whether you can trust someone is a long process – and it’s no different with loans. However, hard money lenders aren’t as concerned with your credit. Yet, you still need to prove you can pay back the loan somehow.
With hard money loans, people prove that they can repay the loan by putting up something valuable as collateral. The most common thing that people offer as collateral is real estate. It’s a valuable and tangible thing hard money lenders can put their faith in, unlike a credit score.
How Does A Hard Money Loan Work? It’s Simple – You Have To Repay It
The lender gives the person the amount they request, as long as it doesn’t exceed the value of the collateral. Then, the lender sets a certain repayment schedule that they expect the person to follow. Typically, people are expected to repay their debt within five years.
If they fail to repay the loan, then the hard money lender can take action to claim the collateral. This is why they don’t look into your credit as much as traditional lenders. If you fail to repay the loan, they can get their money back by taking your house, or whatever you offered as collateral.
While that may sound scary, it’s actually more secure than traditional loans. By declaring bankruptcy with a traditional loan, the lender can claim any of your assets to repay it. That includes your house, but they can also shave your income or claim anything else they want.
With hard money loans, you won’t need to worry about losing anything more than what you offered as collateral. This means that if you’re an investor looking to build a new business, your personal assets won’t be affected too badly if your property doesn’t sell. It also means you’ll never lose more than what you’re already willing to lose.
Hard Money Loans Are a Secure Way To Shore Up Risk
There are two kinds of people that benefit the most from hard money loans. The first kind is investors who are either looking to guarantee themselves a level of security on different ventures or who are just starting out. The second kind of person who benefits from these kinds of loans are average people.
When average people need money due to some financial circumstance, they usually need it quickly. They don’t have time to wait for lenders to look through their financial histories and their credit scores. Hard money loans are usually processed faster than traditional loans, making them a perfect match.
Investors also benefit from a fringe-level of security in their investments. Usually, investors need to take out a loan in order to fund their venture on a certain project. If they take a traditional loan, investors are risking their personal assets on top of the money they take out for the venture.
However, new investors also benefit from hard money loans. New investors often lack the high credit levels of experienced investors and need to make up for it. By offering up real estate and tangible collateral, they can pursue similar ventures as experienced ones, without the same levels of credit.
Finally, hard loans are a way to build credit quickly and easily for people who lack it. That includes both the average person looking to take out a mortgage for a new home and new investors. Hard loans can act as the ticket to better credit and a better life.
Hard Money Loans Can Also Have Hard Downsides
Despite the benefits they offer people, hard money loans can also have significant downsides. First, hard money loans can be more expensive than traditional loans. Their interest rates often exceed the rates of traditional loans.
However, there is a simple reason for this – they are essentially business loans. Most people take out hard money loans when they’re planning a real estate venture, and the lender knows this. The lender is betting on a business rather than a person, and that’s harder to fully trust.
To compensate for this, most hard money lenders require people to prove they have prior real estate experience. That way, they can trust their business acumen more. They can also be more flexible with the timeframe they expect a person to repay it in.
In fact, although the short timeframe may be intimidating for some people, it’s actually a benefit. Hard money lenders are often more flexible than traditional lenders. That means although the initial timeframe may be intimidating, it can usually be adjusted if something comes up.
Hard Money Loans Will Help
Not everyone can walk into a bank with a real estate venture in mind and get a loan. Sometimes, they may have poor credit, or the bank may simply not be confident in the investment. If someone finds themselves in this situation, they may start looking at the other options.
One of those options is to take out hard money loans. It’s natural to ask, “how does a hard money loan work”. The answer to it is simple: they’re similar to traditional loans.
Although they may be a little more expensive, they are more secure and introduce less risk for investors. As long as they’re repaid, there is nothing to be afraid of. And if you can’t repay them for any reason, you can at least know that you won’t lose anything you weren’t prepared to lose.
Hard loans are here to help you, and so are we. Contact us for more information on hard money loans, and to get started on your next venture.