A hard money load is defined as the kind of loan that can be secured using a real property. In financial terms, this loan is considered to be a loan of last resort or some might say a short-term bridge loan. Hard money loans are more commonly used in real estate transactions. Another key aspect of it is that the lender will not be a bank or corporation. Instead, New York hard money loans are normally backed by individuals. The reason why people make use of hard money loans is to quickly put up the amount that they need. It is a double-edged sword however as the cost will also be much higher compared to other traditional means of lending. It is important to note that these loans rely on collateral instead of the financial position of the applicant. This means a reduced time for background checks for the borrower and security for the lender.
As mentioned, property is often used as collateral for hard money loans. The terms of the loan will be negotiated between the lender and borrower. Should the borrower default, the lender is assured the property thus ensuring that the transaction is still profitable from his or her end.
How New York Hard Money Loans Work
Normally loans will be given based on the credit-worthiness of the borrower. This means a credit check, background check, and essentially finding out if the borrower has the ability to repay the loan in due time. Hard money loans, on the other hand, are based on collateral. The amount that the borrower can borrow, as well as other terms of the loan, will be based on the value being put forth as collateral. You will not see traditional lenders like banks and financial groups granting hard money loans. Instead, they will be backed by private individuals or even corporations specializing in such. Hard money loans can be considered to be a risky venture hence the aversion from traditional money lenders.
A usual customer for hard money loans are what we call property flippers. They buy property using the money they loaned then try to up its value either by renovating it or simply trusting its future value appreciation. They will use a collateral which is usually a similar property that they already own. They will then sell the renovated property for a profit before paying back the lenders. This is a relatively short transaction wherein the loan grant and the reselling of the property could all happen within a one-year-period and even just a few months in some cases. The intent of a hard money loan borrower is to pay the loan as soon as possible. Hard money loans usually come with a steep price in exchange for the quick grant.
New York Hard Money Loan Considerations
It should be noted that there is a higher cost for the borrower to go with a hard money loan compared to traditional loan providers. The reason for this is because the lender will be taking in more risk despite being guaranteed a property since the property might not even be of value for the lender or may not be as liquid as he or she would want. This has not slowed down the popularity of hard money loans however seeing as the industry is continuing to see a rise in interest. The reason for this is because the transaction can be done so much faster given the foregoing of background checks and such. Approval can be done as soon as the property has been checked. And lastly, payment schedules and other loan details are highly flexible to the liking of both the loaner and the loanee.
Instances that call for hard money loans include turnaround situations. These are times when the borrower is in need of quick money but is with poor credit given the turnaround situation. As long as he or she owns a property of value, chances are his or her hard money loan will be granted. This has been the go-to move for businesses trying to stave off foreclosure.
New York Hard Money Loan: Pros and Cons
Like most financial instruments, it pays to be more knowledgeable about its structure and its ramifications. In the case of hard money loans, the points of interest include interest rates, loan-to-value ratios and how it all goes down during the approval process.
Pros of New York Hard Money Loan
Compared to mortgages or loans provided by banks, one can say that hard money loans are indeed faster and makes less of a fuss about your credit rating. This is the main advantage of hard money loans which makes it a necessity for a lot of small to medium sized businesses as well as property flippers. On the other end are usually private investors who will take on a risk with the property at hand. It only takes an agreement with the loaner that the collateral is indeed of worth to approve the loan.
For lenders, the process becomes fairly straightforward. Instead of looking at the applicant’s background, credit rating or basically his or her capacity to pay back the loan, he or she will be looking at the value of a property. This objectivity can be appealing to lenders who see value in the property in question. Long time lenders will develop relationships with borrowers which can be likened to a business partnership.
Cons of New York Hard Money Loan
It is understood that hard money loans will have incredibly low loan to value ratios. This is the price for the risk that the lenders are taking for a property that may or may not be valued the same. Additionally, the interest will also be a bit higher than usual which, in turn further solidifies hard money loans as short term.
Finally, there is a lot of oversight and regulation surrounding loans especially from private investors. This can turn off a prospective lender from a business transaction even if it may seem to be profitable.