Hard money lenders are often pointed to as a final resort by mortgage industry insiders. Although this is valid to the point that many borrowers who pursue loans from hard money lenders do so as a last resort, there are many occasions where a hard money lender can be found before a traditional bank. Let’s look at several situations in which a hard money lender might be a first option rather than a last resort. Click to know about DFW Hard Money Lender
Development of Commercial Real Estate
Delays may hold back the start of sales, or the project may go over budget, leaving the developer in a cash-flow negative position, as is the case for all other endeavours. The developer will now need a bridge loan to get through his cash-strapped time and “survive” before the project returns to a cash-positive position. In a conventional loan, the bank will take four to six weeks to process the loan for the applicant. The developer will either default on his initial debt or run out of cash before completing the project. The developer requires cash right away, and sometimes only for a two- to four-month duration. A hard money lender will be the ideal partner in this situation because they can make a loan easily and effectively.
Investor in Recovery
A rehab lender in search of a loan to renovate run-down non-owner owned properties is another example of a hard money situation. Most banks will avoid this loan because they wouldn’t be able to verify that the rehabber would be able to sell the units quickly for a profit, particularly because there are no existing tenants to pay the mortgage. In all probability, the hard money lender will be the only one able to take on such an undertaking.
Properties With Flipping Properties
Real estate developers seeking to “flip” properties can also use hard money loans as a first resort rather than a last resort. If an investor finds a property that they believe is a good deal, they can need easy and safe funding to purchase, renovate, and sell it. Anyone trying to flip real estate does not want to be tied down to the property for an extended period of time, and a hard money lender will assist with that. The debt may also be arranged as an interest-only loan to hold costs down. The principal is repaid and the interest is kept or reinvested in the next investment until the property is sold by the person who is flipping it.
A Foreclosure Borrower
One last hard money situation concerns an individual who is facing foreclosure. Many lenders would not offer a homeowner a loan or restructure their new loan if they are behind on their payments. An person facing foreclosure can obtain a hard money loan to escape foreclosure proceedings and sell the property during that period.
Why would hard money lenders lend money if a conventional bank wouldn’t even consider taking such a risk? There are two parts of the answer. The first is that hard money lenders charge higher interest rates than standard lenders. The second is that hard money lenders demand that the creditor have a minimum of 25-30% equity in the property as leverage. This ensures that the lender will recoup their original investment if the borrower defaults on their loan
A hard money loan is basically a union between a borrower in a tight situation (either due to a time constraint or weak financials) and a risk-averse lender able to take a gamble in exchange for a higher yield. Although hard money loans can be a last resort for many people, there are times when they are the only option.