Hard money loans are private loans made by an individual or a group of investors that have higher interest rates and faster approval processes than conventional loans.
The vast majority of loan lenders require an individual seeking a loan, to provide a number of prerequisites/information prior to lending. Such information include ones credit score, annual income, record and integrity repaying loans, both preexisting and in the past. Some lenders may have other specific requirements.
Typically with most loans, lenders tend to be most interested as to whether or not the individual will be able to repay the loans in a timely manner. With hard money loans however, the value of the asset being used as collateral is the lenders biggest concern. Unlike most lenders who are concerned about the loan recipient being able to repay, hard money lenders are not so quick to panic. In the scenario where one may not be able to repay accordingly, hard money lenders can simply retain and take full control over the collateral. This way the collateral can be used and sold in exchange for the money the lenders were owed.
To be qualified for a hard money loan, the borrower must typically have at least 30% equity. Conventional lenders require much less, even going below 10%, or with FHA loans 3.5% equity. The higher equity amount in the hard money loan ensures lenders have the security they need to approve risky borrowers for loans.
Hard Money Pros & Cons
Going through a hard money loan process can have its positives as well as setbacks in certain instances. The rates in respect to hard money loans being sought by a borrower can be quite costly vs other loans given out by lenders. The upside however, is the programs recipient will have quicker access to money with a not so strict approval and overall process going forward. Furthermore, when dealing and going over loan applications with agents/lenders who can grant you access to hard money loans, they tend to be a bit more reasonable and open to some flexibility when modifying or making certain arrangements as well as changes in some instances during the cycle of repaying back.
Many ordinary loan lenders work on behalf of big corporations who have a set stern policy with no loopholes + everything being final, once the loan is given out and approved.