A hard money loan is a specific type of asset-based financing which is secured by some property. It is a short term bridge loan that is often taken as a last resort. But it has many other applications since it has a short approval process and does not require your credit score.

Unfortunately, there are many misconceptions about hard money loans. Here are some of them:

They are Meant Purely for People with Bad Credit

With hard money loans, you can access financing regardless of your credit score (good or bad). Private money lenders use an asset as security. It can be crucial for people who have emergencies but cannot get a loan because of their credit score.

However, the fast approval process makes it convenient for many business people. It saves time and reduces the risk that you will lose an opportunity in the real estate market due to delays. It opens up more opportunities for people who would have been left out by traditional banking.

Hard Money Loans Have High-Interest Rates

The rates are usually higher than your mortgage, but they are much lower than what you’ll find with a traditional bank. The terms can range from between three and 36 months. The reasonable charges they provide are the reason they are sought after by budding fix and flip entrepreneurs.

Hard money loans currently have a rate that varies between 7.5% and 15%. The rates may vary depending on where you are in the United States. For example, hard money loans in California attract an interest of between 8% and 12%.

You Don’t Need Documentation

A private money lender in California will require that you provide your ID, documentation for the property, and any information that is relevant for the process. However, the procedures are faster because they don’t require a lot of paperwork.

Your lender needs information to determine if the loan is suitable for the house. Lenders of residential owner-occupied loans will want to ensure that the property is compliant with the regulations. There are instances where the lender may request an inspector’s report to establish the exact condition of the structure.

It is a Free-for-All Business

Another misconception is that hard money lenders are loan sharks who will give money to anyone. Many providers have strict rules that follow a comprehensive process. They will often require a down payment to demonstrate commitment in the investment.

Also, businesses must be licensed and must comply with the rules and regulations set for hard money loans. The regulations vary from one jurisdiction to another. Lenders in California may need an additional license from the California Department of Business Oversight. In Washington, the state may also require the lender to have a Residential Mortgage License.

Key Takeaway

Hard money loans have much better rates than private personal or payday loans. They have a fast approval process that unlocks many opportunities for entrepreneurs. Taking time to understand this type of financing will help you see through the misconceptions. You’ll be in a better position to make clear decisions when opportunities arise. They will also help you to continue investing even as you rebuild your credit score.