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what is a hard money loan

September 11, 2018

When you think about applying for a real estate loan, you may think about the lengthy home loan process and the need to provide huge stacks of documentation to the lender before you learn about your loan approval status. However, traditional banks and major financial institutions are not the only options available to you. Hard money loans are a lesser-known alternative. After you learn more about what hard money loans are and how they are unique from other financing sources, you may decide that this is the right financial resource for you to consider using today.

How a Hard Money Loan Is Different
When a traditional bank or financial institution extends money to you through a real estate loan, they typically look for very specific criteria. In most cases, they have little to no room to consider any variations or exceptions to their specific criteria. Unfortunately, this means that some people are not able to obtain real estate financing from these sources. A hard money loan is an alternative that is offered via a private individual investor or by a private company. While these investors or companies may also have guidelines that they want to see when they review a loan request, they also have considerable flexibility to think outside the box. Essentially, if a loan request makes sense, a hard money lender may be able to extend financing to you. More than that, they may be able to adjust loan terms so that the terms work well with your specific scenario.

When to Seek a Hard Money Loan
In most cases, it makes sense to seek financing via a more traditional source, such as a bank or large financing company, as a first step. Rather than submit a full application, consider discussing the details of your loan request with a broker or lending representative. These professionals can usually tell you if your loan request complies with their guidelines. If not, a hard money loan may be a suitable alternative to consider. You may discover that a hard money loan has drastically different terms than a bank loan, so it is important to understand all aspects of hard money loan terms before you decide to pursue this type of financing.

What You Should Know About Hard Money Lending
The requirements that banks and major financial institutions use to determine loan approval status are designed to weed out riskier loan scenarios. Because of their strict requirements, they are able to offer competitive loan terms. On the other hand, hard money loans are usually used for riskier loan requests. Furthermore, private individuals or companies are pledging their own money for these riskier loan scenarios. With this in mind, it is reasonable that hard money loans would be more expensive. In addition, you should also expect hard money loans to have a much shorter term. In fact, hard money loans are usually used as a type of short-term financing. One way that they are used is to fund the project until the scenario is repositioned. Through various repositioning efforts, the loan request may then be eligible for a permanent bank loan within a few years or less. Because hard money loans have shorter terms, it is important that you develop an exit strategy before applying. Another exit strategy may be to sell the property.

Hard money loans are not suitable or ideal for all situations, but they can be beneficial in many unique situations. If you are having trouble getting your real estate loan request approved by a bank or another traditional financial source, consider comparing hard money loan options as your next step.

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