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Advantages of Hard Money Loan
It offers immense benefits that are generally not available through large banks or lending institutions. Some of the benefits include:
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Minimum Conditions: In order to qualify, a borrower needs to meet a short list of criteria, whereas a bank has several set-in-stone conditions that need to be met. This may include income history, credit reports, etc. The whole process can be drawn out and the borrower may not even be finally approved. On the contrary, these loans are quite simple and straightforward. If the hard money lender assesses that a borrower’s target real estate investment is an excellent value and the borrower has at least 20% equity to put into the deal, it is likely that the investor will qualify.
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Quick loan approval: You can get it approved much faster than traditional banks or financial institutions – which can take as little as 3-4 weeks. In many cases, a borrower can receive approval and financing within a week – especially if the requested documents are submitted on time. The main reason moneylenders are able to sanction loans quickly is the short list of documents required and the small size of the lender’s organization, which does not need to deal with the corporate red tape that banks do.
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Generous with credit history: It will be more lenient with your credit history as well. If you apply for a loan from top financial institutions, one of the main factors they will check is your credit. If a borrower doesn’t fit into a bank’s strict “credit box,” their chances of qualifying for a loan drop significantly. In the case of hardline lenders, credit history doesn’t matter as much as the value of the property and the borrower’s equity – or “skin in the game”. As long as both meet the lender’s expectations, you have a good chance of getting the loan.
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No prepayment penalty: Another important advantage is the absence of prepayment penalty. If you take a loan from a large financial institution, you may face prepayment penalties if you repay the loan before the maturity date. You can avoid these charges by opting for a hard money loan. It is not difficult to find a hard moneylender willing to lend you money without prepayment penalty in the term sheet.
Even though hard money loans offer the above mentioned benefits, they are not completely without drawbacks. Some of the disadvantages of hard money loans include:
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high interest rates. Since the lender is taking on additional risk by lending on a property that is not financed by the bank and on a borrower who would not qualify for a bank loan, a higher rate of interest is usually in play. This is an important factor to keep in mind while deciding whether to opt for a hard money loan or not.
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Short Term Loans. If you are looking for long-term financing, you may find it difficult to get a hard money loan. If you need financing for more than 12-18 months, a traditional bank may be a better bet.
If your real estate investment is in a location close to you, it can be very easy to apply for as you will find many lenders willing to offer them. However, before jumping the gun and applying to all the available lenders, keep in mind that you should spend some time researching them to find the best lender.
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