Hard Money Lenders And Their Disadvantages
Hard money lenders are people who provide mortgage-backed debt and equity financing. While hard money is not synonymous with investment real estate, many hard money lenders are funding real estate investments, including multi-unit residential and commercial properties. The difference is that hard money typically refers to an individual investment property or commercial real estate that doesn't yet qualify for standard financing, while hard money lending refers to a separate entity that typically doesn't have any track record of investment properties. So what are hard money lenders, how do they differ from traditional lenders and how can hard money lenders benefit you? Keep reading more on this article for you to understand more on this topic.
A hard money lender is someone who generally doesn't have any real estate experience, making them an investment opportunity or borrower who is inexperienced. With this said, there are a lot of hard money lenders who do qualify to provide FHA, VA, and other loan programs for those looking into real estate investing, as well as people who are already in the industry looking for larger loans. These programs are provided through HUDs Federal Housing Administration, which is part of the Department of Housing and Urban Development. The FHA program is not specifically for rehab properties, however.
It is also available for primary homes and for manufactured homes, although the latter two categories tend to have stricter requirements. Because these programs are harder to qualify for, most banks don't make these types of loans; however, hard money lenders can and do make them on a regular basis.
One key benefit of hard money lenders is their ability to work in very small markets. This allows them to target smaller populations who are interested in getting involved in property investing. This is unlike traditional loans, which tend to target investors with large bank accounts and money. Because hard money lenders don't need to conform to the lending standards of traditional banks, they can provide lower interest rates and smaller loan amounts. Check out MOFIN Loans for a reliable information that will help you to make a great decision at this instant.
Another benefit of working with hard money lenders is their ability to provide funding in hard money loans for an extremely short period of time. Typically, this comes in the form of a "short term loan," which is designed for investors who have a plan to sell their property within a few months to a couple of years. In many cases, this comes in the form of a "buyer loan" or "sellers loan." These short-term loans are great for investors who are looking for a quick sale, but don't have the time to wait through the approval process required for a traditional loan from a bank or credit union. Also, if the investor knows that they will soon be selling their home, this can provide them with the peace of mind that they need to get their finances back on track and start looking for larger investments.
However, there are some disadvantages to working with hard money lending institutions as well. One of the major drawbacks is the increased risk associated with the investment. Since the interest rates are typically much higher than would be used with traditional loans, this can add a significant amount to the final cost of purchasing a property. Some investors also choose to work with these institutions because of the seemingly lower risk associated with the investment. However, this may not necessarily be the case, especially when the investor doesn't have experience in the property market or has recently lost their previous investment.
In addition to the above-mentioned disadvantage, hard money lenders often charge a " origination fee" on the loan amount they provide. This fee is assessed against the total loan amount, and is often quite substantial. The reason for the origination fee is to cover the cost of collecting the monthly payments from the borrower. In addition to being a higher cost than conventional loans, this fee can also delay the actual rehab process by up to several months, causing the investor to be unable to sell the property altogether. While these fees can put borrowers at great financial risk, there are also benefits to working with hard money lenders, such as the opportunity to access a specialized and select market.
To understand more about this topic, it is wise to check out this post: https://en.wikipedia.org/wiki/Hard_money_loan.
