The past several years have seen significant growth in a certain lending trend– hard money loans. Though it has technically been around since the 1950s, this form of lending has grown in popularity for a variety of reasons. People are drawn to them because they tend to have faster documentation and approval processes, are mutually beneficial to the borrower and lender and are generally free of frivolous costs and fees, not to mention the fact that they are also not based on credit scores. But before deciding to jump on the bandwagon, both investors and potential borrowers should learn as much as possible about this arrangement.
Where Does ‘Hard Money’ Come From?
Rather than banks, hard money generally comes from private lenders. Instead of credit scores, it is based on assets and the value of the project or property the money will be funneled toward. This means fewer obstacles and, usually, less time between the loan application and the release of funds.
What Are Hard Money Loans Intended For?
Hard money loans are meant for projects like construction and remodeling, house flipping, property purchases and real estate transactions in general. They can be used for both long-term and short-term projects, but most financial experts recommend going for short-term because there is a lot more uncertainty with long-term situations. For example, project values can change, and borrowers may find that they still don’t have enough funds, or investors may see their returns not turn out as expected.
The Mutual Benefits
Again, the borrower often has faster access to the money they need in addition to having less red tape to cut through. Instead of having to go to a bank with a proposal or address a committee, the borrower deals directly with an individual or small group of lenders, and the approval process generally just consists of whether or not the lender will say “yes”. The lender meanwhile benefits by getting a higher return on their investment– in this setup interest is either a fixed amount or at a higher percentage than private banks. And just as the borrower gets the invested funds faster, the lender also has less paperwork and legal matters to wade through in order to get their return.
Know the Law
Generally speaking, there are actually not too many laws governing hard money loans (part of the reason the lending process is easier is because it’s largely unregulated). That said, certain states (like Tennessee and Arkansas) have restrictions placed on interest rates that can ultimately affect hard money arrangements. Both lenders and borrowers should thoroughly educate themselves on their local state laws before moving forward with a hard money deal.
The Bottom Line
Hard money loans will most likely continue to grow in most areas, especially in places where real estate and construction are booming. Interested borrowers should talk with local private lenders about this opportunity.