Hard money loans are an alternative way for you to get a quick loan to purchase property. They are used mainly by real estate investors who prefer to buy and flip homes. Hard money loans don’t require the scrutiny of conventional home loans in that your personal credit score and income are not the basis for qualification (although they are a consideration). Instead, it’s about the potential value of the property. While there is a lot of information about hard money loans, it can be confusing to sort out what’s fact or fiction. Here’s the biggest myths about hard and private money loans debunked.
MYTH: Hard Money Loans Have Very High Rates
Hard money loan rates are typically higher than a standard residential mortgage, but they aren’t as high as retail interest rates. The average range of rates for a hard money loan is between 7-15%. However, hard money loans usually have shorter terms, so keep that in mind. Plus, hard money loans come with the advantage of being quick to be approved and fast to close. You can get your money sometimes within a few days, which means you can get to work on your project faster.
MYTH: Hard Money Loans Are Only for Those with Bad Credit
Many different people use hard money loans, regardless of their creditworthiness. Most investors that seek out hard money loans are primarily focused on the quick approval process.
Hard money lenders are focused on asset-based lending, so they are much more concerned with the collateral (the property) than the individual’s FICO score. Credit scores have a hand in the approval process, but less than stellar credit isn’t the kind of dealbreaker it is for traditional lenders. This type of financing opens up more options and possibilities for anyone interested in investing in real estate.
MYTH: Hard Money Lenders Are Unregulated Loan Sharks
Completely false. Every state has hard money lender regulations. Hard money loans also offer a better rate than payday loan operations or unsecured private loans. These lenders are unlikely to just give out money to anyone who wants it. They have rules and processes to follow. Specifically, here’s information on West Coast regulations:
- Hard money lenders must obtain a license with CalDRE
- They must adhere to California Finance Lenders Law
- Commercial lenders may also need a license from the California Department of Business Oversight
- Loans over $50,000 require a license by the lender
- New lenders must apply through the Nationwide Mortgage Licensing System
- Usury laws are in place to set limits on the rate
- Any party engaged in hard money must hold a Residential Mortgage License issued by the state
MYTH: Approval Requires No Documentation
With hard money loans, the approval process is easier and you’ll need to provide fewer documents than with a traditional loan. The most critical piece of documentation is the appraisal as this provides the lender with the necessary information to verify that the property has the potential value to justify the requested loan amount. Additional documents you’ll need as a borrower include a government-issued ID, a title report that shows the property is lien-free, and in some cases, an inspection report to identify the condition of the property.
MYTH: You Can Gain Approval with Zero Money Down
Most lenders are going to need the borrower to put some money down, which is a sign that you are invested in the project. Putting down money is also a sign to a lender that you are financially secure and able to repay the loan.
MYTH: You Don’t Need a Broker to Get a Hard Money Loan
While a broker isn’t a regulatory rule, not using a broker can be risky. A licensed broker offers you their expertise and experience to get the best loan for your project. Regardless of it’s your first investment or you’re a seasoned borrower, working with a broker offers a better and more seamless process. An experienced broker has access to a large pool of hard money and private money lenders and can match you with the right lender for your specific loan scenario.
Is a hard money loan right for your situation? Contact us and we’ll explore your financing options together.