Hard money loans have been around for a long time, and many businesses use them constantly. Before you put your signature on the loan contract, though, you need to make sure you’re prepared for the process. What are the risks of this type of financing and what are the benefits?
Why Are Hard Money Loans Used?
The basic purpose of a hard money loan — also called a bridge loan — is to provide funding for business needs quickly and flexibly. This type of business loan sprang into use because it fills a common need: fast approval.
Traditional loans can seem like they take an eternity to get approved. When someone wants to purchase a house using a conventional mortgage, they may have to wait up to two months. Business owners don’t have that kind of time to wait around for investments.
Another reason bridge loans are helpful is that they’re more adaptable than traditional financing. Most loans for investment properties have strict requirements for what type of property is acceptable and how the funds must be used. Remodeling projects get rejected right away.
With bridge loans, you can purchase a property, perform remodeling, expand it or make other changes. Then you sell the real estate for a profit and use the money to pay off the loan.
Why Are Hard Money Loans Easier To Qualify For?
At this point, you may wonder how bridge loans can be all sunshine and rainbows compared to traditional loans. There must be some trick somewhere, right? Not really. The reason these loans are simpler and faster is that they’re backed by collateral.
Conventional loans rely mainly on your credit rating for approval. The bank wants to see that you have exceptional credit and a long time managing money successfully. Even then, your application may be denied.
Bridge loans give lenders more peace of mind. They know that if the client decides not to pay the loan, at the very least it’s possible to sell the property and recover most of the money lent. That’s why the loan amount is always only a portion of the property’s value, called the loan-to-value ratio.
How Can You Decide If a Hard Money Loan Is a Good Choice?
Asset-based financing has a greater risk than traditional financing because you can lose the property if you don’t pay back the loan. This a short-term funding option, not a long-term one. If you know you can resell the property soon after buying it, though, hard money financing can be a way to make great profits.