Understanding Hard Money
Hard money refers to a type of loan acquired wherein the amount that could be loaned is determined by the collateral involved in the transaction. This is a type of security loan that’s purely asset based. The common collateral on hard money is the real estate owned by the debtor. The lending company will determine the price of the real estate and compare that price to LTV or loan to value formula. Basically, the LTV of the lending company for hard money is usually within the range of 60%-70%. Some would offer relatively higher but they are only given to debtors who may offer a larger estate for hard money.
Advantages of Hard Money
The main advantage of hard money is the ability to obtain a loan in just a few days. The debtor will just get in touch with the lending company, show the documents, have an inspector come over to verify claims and the debtor will immediately get a feedback from the lending company on the amount he or she can loan. As long as the documents that proves the ownership of the collateral, the process will go through.
Another advantage of hard money is the ease of transaction. You don’t need any guarantor for hard money. Your guarantor or collateral would be your real estate or the asset that you have put up as collateral. Lending company will practically do everything on your behalf as long as you show ownership of the asset.
It doesn’t also matter if you have been bankrupt or the house is not in good condition. The inspector will just make some adjustments on the pricing. Your credit line is not considered since you are providing collateral that’s based on the actual price of the asset.
Disadvantage of Hard Money
Hard money is often difficult to pay back. The reason for that is the steep interest rate imposed by the lending company.
Hard money loans usually have an interest rate of no less than 11% and no more than 15%. Your principal loan will be added with this interest rate so that they will help you determine your monthly payment. Usually, you would have to pay your debt in 12 months or less.
Aside from rates there are also points in hard money. The points are additional fees that come in percentage of the loaned amount. You have to pay the points, usually upfront, as this will be the “fee” of acquiring the services of lending company. There are also additional fees that should be expected from hard money. There are processing fee, commissions and other fees that might put a dent on your loan.
Hard money loan should be your last resort if you really need some cash fast. Hard money is a secured type of loan which could seize your property if you don’t pay them back on time. If you end up with this type of loan, be sure you have the right source of funds to pay your loan on time. The steep interest rate will just increase your loan exponentially of you don’t pay them on time.