If you need money in a pinch, you may be considering a hard money loan. However, before you sign on the dotted line, you need to make sure that this is the best financial option for your situation. By evaluating the pros and cons of hard money loans, you can ensure that you’re not going to end up paying a fortune in unexpected fees and high interest costs.
What Is a Hard Money Loan?
Hard money loans are an alternative lending option that can get you money quickly and with fewer requirements involved. This is because hard money lenders focus on your collateral instead of focusing on your ability to repay by analyzing your credit and employment histories. If you aren’t able to repay your loan, they will simply take your collateral and get their money back that way.
Hard money loans are generally short-term loans that can last up to one year but should be paid back as soon as possible to avoid paying a fortune in interest fees. Hard money loans may be a good option for those looking for quick money to purchase a property or those without a stellar credit history.
What Are the Pros of a Hard Money Loan?
Every loan option will come with a unique set of pros and cons to consider. Here are the pros of a hard money loan that you should know about:
- Efficiency: Hard money loans can get you money quickly as the application, approval, and closing process take less time than those seen with traditional loans. With a market that’s constantly moving, this is something that you may want to prioritize in terms of financing so that you can compete with cash buyers.
- Qualifications: Hard money loans have less strict qualifications compared to traditional loans. For instance, you may not need to have a stellar credit score or consistent income to qualify for a hard money loan. As a result, this type of loan is more accessible to a larger number of people.
- Flexibility: Hard money loans are more flexible than traditional loans. For instance, you can use a hard money loan to easily purchase and renovate a home that you’re flipping. While there may be some restrictions when dealing with a hard money loan, they are usually less extensive than those seen with traditional loans.
- Repayment: Hard money loans don’t charge repayment penalties since the loan is designed to be short-term and should be repaid as soon as possible.
What Are the Cons of a Hard Money Loan?
In addition to the pros of a hard money loan, here are some cons that you should consider in order to make the best financial decision:
- Interest rates: Perhaps the biggest con of hard money loans relate to the higher interest rates that they charge. This is because these loans are considered riskier by lenders, so they charge higher interest rates to help mitigate this risk. Generally speaking, you can expect to pay an interest rate between 10% and 15% for a hard money loan.
- Fees and costs: In addition to higher interest rates, hard money loans may also come with higher fees and costs -- also designed to help mitigate some of the risk on the part of the lender. For instance, points for hard money loans typically range from 2% to 4%.
- Timeframe: While a short-term timeframe can be a good thing, it can also be a bad thing if things don’t go as planned. One year may seem like a long time, but it can go by quick -- leaving you on the hook for the entire loan amount as well as a ton of money in interest as well.
What Are Alternative Lending Options to Consider?
While hard money loans may be an option to consider when buying property, there are alternatives that you should also be aware of.
- Bridge loans: This option allows you to secure “gap” financing to fund the purchase of property until permanent financing is secured. Bridge loans offer lower interest rates than hard money loans and can last for up to three years. Bridge loans can be used to finance the purchase of a new home before selling an existing home. It can also be used to help foreign investors qualify for financing without traditional requirements like W-2s, 1009s, and income tax returns.
- FHA loans: If you’re looking to purchase a home with below-average credit, you may want to consider a federally-backed FHA loan. This loan program is designed to make home buying more accessible for those without stellar credit histories, employment, or cash reserves.
- Private loans: This option allows you to secure financing without going through an entity like a big bank, government agency, or pension fund that often comes with strict requirements and little flexibility. Private loans involve an investor providing a loan or investment to an individual for a specific purpose, like real estate development.
How to Choose the Best Financing Option and Lender
The best financing option for you really depends on your personal circumstances. That being said, if you have a less than ideal credit score and inconsistent income, you may want to consider alternative lending options like hard money loans. No matter which financing option you choose, you need to make sure that you have the right lender to provide you with a smooth and steady process from start to finish.
When looking for a lender, you should first look for transparency. You should be clear on your interest rates, the terms of the loan, and any fees involved in processing the loan. All of this should be clear and communicated up front. Encountering unexpected fees during the process is a major red flag that this lender might not be the best choice.
You should also look for communication and support when looking for a lender. You should never be hung out to dry by a lender that refuses to answer you or respond to your questions. Instead, your lender should be helpful and responsive throughout the entire process. Communication issues from the get-go are a bad sign that could only continue throughout the life of your loan and prove to be problematic down the line.
While it may seem impossible to find a lender that meets all of these qualifications in an industry that can be pretty intimidating, they do exist! Vaster, for example, is a premier bridge loan lender that prioritizes transparency, communication, and support for all of our clients. Furthermore, we also prioritize efficiency and are able to get you an initial response on your loan application within 24 hours and close within seven business days. We know how valuable this is in a real estate market that’s nearly impossible to keep up with!
With our bridge loans, you’re able to solve the gap in your financing while you wait for your current home to sell or wait for permanent financing to come through. Our bridge loans offer lower interest rates and generally more favorable terms than hard money loans, as you can expect to pay between 7.5% to 10% in interest depending on your qualifications.
And speaking of qualifications, we do that differently too to make financing more accessible. We focus on collateral, borrowing entity, and financial strength when considering your application. While we will run your credit report, it’s not the only thing we consider. As a result, applying for a bridge loan through Vaster Capital is a great option for foreign investors looking for financing that may be challenging to obtain without an American credit history or traditional documents like W-2s, 1099s, or tax returns.
Applying for a bridge loan through Vaster Capital is also a great option for homeowners looking to make a competitive offer on a new home without making it contingent on the sale of your current home. This gives you a leg up on tough competition and allows you to get into your new one while you wait for your old one to sell.
At the end of the day, there’s an endless amount of loan and lending options out there for you to consider. However, with the right amount of research and consideration, you can find the right solution for your unique financial situation.
Final Rundown
While a hard money loan is one option to secure financing for real estate properties, there are also other options to consider. No matter which financing option you choose, make sure to go with a responsive and transparent lender that will contribute to seamless application, closing, and repayment processes. When it comes to meeting these qualifications and more, there’s none better than Vaster Capital. So feel free to reach out to us with any questions you have about different lending options so that we can help get you into your dream property in no time!
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