About Private / Hard Money Loans

About Private / Hard Money Loans

 

Private / Hard money lenders are generally private investors or companies that deal specifically in this type of lending. You won’t find hard money loan options at your local bank. Private / Hard money lenders aren’t subject to the same regulations that traditional, conforming loan lenders are. This means that they are, for the most part, free to make their own rules about what credit scores or debt-to-income ratios they expect their borrowers to have. It’s possible to find a hard money lender who will give you a loan even if you’ve been denied by more traditional lenders. For hard money lenders, the most important factor isn’t the borrower’s credit score but the value of the property being financed.

How Does A Hard Money Loan Work?

Let’s take a look at how hard money loans work compared to more traditional forms of financing.

Traditional Loan

Though not a formally defined category, in this context “traditional” refers to loans that are taken out through a process most people are familiar with: you apply for a loan, the lender checks your credit and ensures you have the ability to repay them and, if they determine that your finances meet their standards, you’re approved for the loan.

 

There are many different types of loans that fall under this umbrella, including mortgage loans, auto loans, personal loans. Though it’s usually possible to get these types of loans from private lenders that don’t have the same requirements that traditional lenders do, these private loans can be more expensive and less advantageous for borrowers because the risk is much higher.

 

Traditional lenders will take a thorough look at your entire financial situation, including your income, the amount of debt you currently owe to other lenders, your credit history, your other assets (including cash reserves) and the size of your down payment.

 

These lenders go through this sometimes lengthy process to minimize the amount of risk they take on when they lend money to an individual. By ensuring their borrowers are creditworthy, lenders can offer better rates and overall more affordable financing.

Private / Hard Money Loan

With hard money loans, the lender approves a borrower based on the value of the property being purchased.

 

The lender may do a quick check of your credit or finances, but in general, the process will be much less rigorous than it is with a traditional loan. This allows the process to happen more quickly, so borrowers can get their money in a matter of days as opposed to weeks or even months.

 

The downside of this process is that the lender takes on significantly more risk, which translates to a more expensive loan for the borrower. Hard money loans typically come with high interest rates, and lenders might require larger-than-average down payments (though this isn’t always the case).

 

Hard money loans also tend to have short repayment periods – often just a few years. Compare this to traditional mortgages, which commonly come with 15- or 30-year terms.