There are many stereotypes that surround the use of so-called “hard money” loans, and most of them involve desperation. The stereotypes tend to paint a grim picture about how these kinds of loans typically work, who takes them out and what they’re used for, so let’s use the practices of hard money lenders to examine the advantages and disadvantages.
Start with the advantages. Hard money loans are often easier to get than those secured through a bank or a mortgage lender, largely because the approval process is much quicker. In many cases, credit checks aren’t necessary, nor is a detailed examination of a borrower’s credit history.
This is because the basis of the loan is the potential resale value of the property on which the loan is based if the borrower defaults.
Another potential advantage is that California hard money lenders usually don’t use the traditional underwriting process that is standard in the industry. The terms of the loan are often determined on a case-by-case basis, which means those applying for a hard money loan can usually negotiate adjustments in the payment process for the loan if their situation warrants it.
Terms can be lengthened or shortened to some degree, and borrowers may be able to make a fewer larger payments or more smaller ones. They may even be able to mix and match these possibilities into their own personal formula.
The cons tend to be fairly obvious as well. Because the property itself is the sole protection against default, hard money loans often have a lower LTV (loan-to-value) ratio than traditional mortgage loans, which usually have a ratio of approximately 80 percent.
For a hard money loan, this number may go as low as 50-70 percent, depending on the borrower’s situation.
The other downside is the interest rates. These can be quite high, in some cases even higher than those of subprime loans. Based on numbers compiled in 2019, interest rates ranged from 7.5-15 percent, with the individual number depending on the length of the loan. Just to compare, the prime interest rate during this period averaged 5.25 percent.
One final drawback that hard money lenders may not provide financing for an owner-occupied residence, but this depends on the rules and regulations applicable to the individual situation.
If you are going to consider a hard money loan, make sure to get a reliable company and ask plenty of questions about the terms and your rights. One of the best companies in California Hard Money Direct, which is one of the best hard money lenders.