Conventional financial institutions set very rigid terms and follow a rigorous process before approving a loan. This takes a lot of time which many real estate dealers cannot afford to waste. So, many people turn to a hard money loan in Denver as their alternative solution. A hard loan is a loan borrowed based on the collateral’s value rather than credit scores or financial history. These loans are generally used to buy a new property, fix and flip existing property, capital for business, and other projects. There are many reasons that borrowing hard money can be a good investment and many that it can be a bad one. One needs to understand the benefits and drawbacks of a hard money loan before applying for it.
Pros Of Borrowing Hard Loan Money
Following are some reasons that borrowers prefer hard loans:
Quick Approval Process: Hard money dealers approve loans based on the market value of the collateral and the borrower’s equity. Other financial details are secondary. So, the approval process does not take very long. At times, loans are approved the same day borrowers apply for them. A quick approval leads to the quick availability of the principal amount, usually a week after the approval.
Approval Not Affected By Credit Scores: This is the main reason that real estate dealers borrow a hard money loan in Denver. Banks reject loans if the borrower’s credit score is even slightly below their standard. Even the minutest hitch in the borrower’s financial records can cause a denial. Hard money lenders are not bothered by poor credit scores as long as the collateral and equity are satisfactory.
Flexible Terms & Conditions: Hard money lenders deal with borrowers at an individual level. So unlike banks that have rigid terms and conditions that all borrowers must adhere to, hard loan lenders are more flexible. During the negotiation process, the lender and the borrower can negotiate terms based on their requirements and agree on mutually beneficial conditions.
Business Partner: Often, hard loan dealers are experienced in the real estate market. So they can study the borrower’s business plan, identify flaws and offer advice. Lenders are just as invested as the borrower in the success of the real estate venture.
FInance Unconventional Projects: Banks may not approve loans for unconventional real estate projects like fix and flip despite a good credit score and a solid financial history. On the flip side, hard money lenders are familiar with unconventional real estate projects and are willing to finance them.
Cons Of Borrowing Hard Loan Money
Following are some reasons real estate dealers are cautious about hard loans:
Short Period: A hard loan is a short term loan by definition. The term usually extends to one year. So the borrower has to return the money within twelve months or less to prevent loan default. A default could result in penalties or the loss of the property placed as the collateral. If the project is unsuccessful, repaying the large amount can be difficult.
High Interest: Hard loan is lent for a short term, so generic interest rates cannot make enough profit on the amount lent. Lenders charge high-interest rates to make up for the lack of profit during the short duration. This can add up to a very high amount depending on the principal amount borrowed.
Risky: The short term period and high-interest rates make hard money a risky proposition. Unexpected delays in the real estate project could result in extension fees or loan default, making the venture a failure.
Low LTV Ratio: Hard Money lenders limit the principal amount to 50 to 70 percent of the collateral property’s value. If the collateral is being repaired, the value is based on the estimated value after the repairs. Unless the property’s market value is high enough, the principal may not be sufficient for the project.
In conclusion, hard money loans are quick and flexible alternatives to bank loans but are costlier and riskier at the same time. They are ideal for unconventional real estate projects that need to be started and ended in the short term.