Hard money loans take a lot of flak in the mainstream media. So many financial and investment experts warn people to stay away from hard money due to higher interest rates and fees. They like to say that hard money is a borrowing option of last resort for people who cannot get regular loans due to bad credit.
If this is what you believe about hard money, it is time to rethink things. Nearly everything the mainstream media says about hard money isn’t true. Do a little digging and you will discover something fascinating: hard money loans are not so bad when you understand how they work.
Short-Term, Asset-Based
Hard money loans are short-term loans by design. Actium Partners, a Utah hard money firm based in Salt Lake City, says that a typical hard money loan has a term of 24 months or less. It is rare to get longer terms. There is a reason for this: lenders are willing to take on more risk if they can get out more quickly.
Another interesting aspect of hard money is that it is asset-based. This means that approval is based primarily on the strength of the borrower’s assets, particularly those assets offered as collateral. Hard money lenders do not tend to put a lot of stock in credit histories, P & L statements, income verification, etc.
The Fees and Rates Criticism
Look at any article criticizing hard money and you are likely to see that the number one complaint is high interest rates. Maybe you can get a rate in the single digits on a conventional loan while your rate on a hard money loan is in the double digits. On the surface, it appears as though you pay more interest. But are you?
A lower interest rate on a 10-year loan is still likely to cost you more in total interest payments than a higher rate on a two-your hard money loan. When it comes to borrowing, time is the enemy. The longer a loan’s terms, the more interest you ultimately pay.
As for the fees, they are higher. But just as with interest, hard money lenders need to assess higher fees to mitigate their risk. In exchange, you get easy approval and extremely fast funding.
Loans in Days, Not Months
Actium Partners says the majority of their clients are real estate investors who come looking for fast funding. This is one area in which banks absolutely cannot compete. A traditional bank loan could take weeks for approval and then months for funding. That will not do for real estate investors.
Commercial real estate moves quickly. Investors don’t have time to wait around for banks. So instead, they go to hard money lenders capable of making a decision within hours. Once approval is given, it is a matter of completing the paperwork, getting signatures, and transferring the funds. You are talking a couple of days at most.
Actium once funded a deal in one business day, after getting a call from a desperate client on a Friday morning. The loan was approved later that day and the paperwork completed. By Monday morning, Actium was ready to transfer funds to the title company handling the transaction.
It’s in the Details
Just because you read online that hard money is a bad deal doesn’t make it true. Look into it yourself. Dig deeply into the details because that is where you will find the truth. You’ll discover that hard money is actually an attractive and viable lending option that some borrowers prefer. Hard money isn’t so bad when you learn how it works.
