What is Hard Money Commercial Lending?

What is Hard Money Commercial Lending?

Hard money commercial loans are for investors in need of quick financing by private lenders. Applying for these loans requires less effort compared to traditional financing. The commercial hard money lending decision depends on the borrower’s assets.

The advantage of hard money is flexibility and fast access. The loans are short-term, and the lenders can be a company or individual. The borrower and the lender get to agree on the terms of these loans.

The information below will help you understand how hard money commercial lending works. It will also provide the pros and cons of hard money.

How Hard Money Commercial Lending Works

Property owners who would wish to renovate and sell the property can consider hard money loans. The guidelines of hard money commercial lending are different from the traditional method. Some investors purchase properties that need repair, then renovate and sell them for a profit. Hard money loans involve a modern process of borrowing loans for real estate. The loan does not come from the bank but from investors and individuals.

Traditional lending requires proof that the lender can pay the loan. They also consider the lender's credit score and income. If the borrower has a good credit score, income, or savings, they might qualify for the loans. However, it might be challenging to secure a loan if their credit score is low and their debt is more than their income.

Unlike traditional lending, hard money loans do not focus on the borrower's income or credit score, but the value of the collateral that will secure the loan. If the borrower cannot pay the loan, the hard money lender will sell the collateral and get their money back.

Hard money loans are short-term loans and you may use them as quick money for a purchase. However, the interest rate will keep increasing, and paying the loan earlier will help avoid the high debt due to the high interest rate.

The interest rate of hard money loans is relatively higher than financing through banks. However, hard money is a quick way to access capital, with minor approval and a flexible repayment procedure. Hard money loans are suitable for borrowers that need short-term financing, with poor credit and an asset to secure a loan.

Pros and Cons of Hard Money Commercial Loans

There are many advantages and disadvantages of hard money loans. Factors like interest rates, approval process, and lending terms determine whether hard money could be a pro or a con.

Pros

The advantage of hard money commercial loans is that lenders do not review the borrower's financial documents or income. This makes the application process fast and easier. The approval process is more straightforward than traditional loans applied through the bank.

The lender's primary focus is the collateral and not the borrower's financial position, making it easier for the investors to decide. The hard loan lender is not very concerned with the repayment of the loan as there is an excellent opportunity for them to sell the property if the borrower fails to pay the loan.

Unlike the traditional method of financing in commercial real estate, which requires financial underwriting and extensive paperwork, hard money loans are easy and quick.

Cons

Like other loans, hard money commercial loans have drawbacks too.

The method of borrowing is expensive, and there is a requirement to pay closing costs, document fees, and other fees to get the funding.

The interest rate of hard money loans is high. The property can be a collateral if the borrower defaults. Also, the borrower may not receive the loan if the security is not compliant with the terms.

The short-term payment period might be risky - if things do not go well, a borrower may end up paying more interest than they expected. The lenders determine the property's value, which may drain the borrower's resources more than expected.

Conclusion

Hard money commercial loans are the best way to secure quick loans for real estate investments. House flippers, real estate investors, and developers use hard money loans because they are straightforward and secure financing.

Unlike traditional loans, hard money loans' interests are high, although the borrower can access the money in a short-term period. Also, assets sold determine accessibility to the loan and not credit score or income. When searching for a lender, ensure it is a reliable and reputable firm with an excellent record of accomplishment and great reviews.