There are many reasons why a hard money loan is considered a last resort. The borrower is required to use their own property as collateral rather than their credit. This loan type also tends to be more expensive than others. The closing cost and origination fees cost more and its interest rates also tend to be higher. Then there’s the down payment which usually falls between 30-40% of the overall loan. As a whole, a hard money loan requires a lot of risk to fall on the borrowers rather than the lenders.

Benefits

The borrower can still benefit, however. Getting approved for a hard money loan is easier and the money is received faster. A more flexible repayment schedule is also possible. In addition, this type of loan is very useful in some areas, such as real estate. Homeowners who want to buy a new home can use their old one as collateral before it is sold. House flippers and those who wish to buy investment properties are also frequent customers of hard money lenders. If it’s the right situation, a borrower who chooses a hard money loan can definitely be making the right choice.

Requirements

If a borrower wants to apply for this type of loan, they will need the following items. The down payment/collateral is the most important. If one property isn’t enough for the total needed, sometimes hard money lenders will allow for “cross-collateralizing”. This means that the borrower will use multiple properties for the down payment rather than just one. Having a large amount of capital is also important. This will help the lenders trust the borrower to be capable of paying back the loan. They will be more likely to approve the application in this case.

In cases of using a hard money loan for real estate, hard money lenders may also wish to look at the borrower’s real estate experience. If the borrower is new to flipping homes, the lenders will have less faith in them to finish the project. They may still approve the loan, however, if the borrower can prove themselves by showing them that they have a satisfactory plan for the project.

A hard money loan can be a great idea for the right borrower and situation. Those wishing to apply for one should take careful consideration of all the details before making their final decision.