If hard money is expensive, why would you use it? Hard money has its place for
certain borrowers who cannot get traditional funding when they need it.
Speed: because the lender is mostly focused on collateral (and less concerned
with your financial position), hard money loans can be closed more quickly
than traditional loans. Lenders would rather not take possession of your
property, but they don't need to spend as much time going through a loan
application with a fine toothed comb – verifying your income, reviewing bank
statements, and so on. Once you have a relationship with a lender, the process
can move quickly, giving you the ability to close deals that others can’t close
(that’s especially important in hot markets with multiple offers).
Flexibility: hard money agreements can also be more flexible than traditional
loan agreements. Lenders don't use a standardized underwriting process.
Instead, they evaluate each deal individually. Depending on your situation, you
may be able to tweak things like the repayment schedules. You might be
borrowing from an individual who’s willing to talk – not a large corporation
with strict policies.
Approval: the most important factor for hard money lenders is collateral. If
you’re buying an investment property, the lender will lend as much as the
property is worth. If you need to borrow against a different property you own,
that property’s value is what the lender cares about. If you’ve got a
foreclosure or other negative items in your credit report, it’s much less
important – some lenders might not even look at your credit (although many
lenders will ask about your personal finances).
Most hard money lenders keep loan-to-value ratios (LTV ratios) relatively low.
Their maximum LTV ratio might be 50% to 70%, so you'll need assets to qualify
for hard money. With ratios this low, lenders know they can sell your
property quickly and have a reasonable shot at getting their money back.