Your home. It’s what you’ve worked for over the past few decades. What you’ve saved for. It’s where you live. Where you sleep. Where you eat. And it’s yours.
Well, technically… it still belongs to the bank. You’ve been paying off your mortgage almost dutifully over the past few years. Almost dutifully. There were a few months you lagged behind. You’re still making up for it. But fate’s a peculiar entity. It always seems like monkey wrenches get tossed during the most inconvenient times. And you need the equity that’s been part of your home. Immediately.
There are alternatives to refinancing and home equity lines of credit. Hard money loans are becoming increasingly viable as an alternative to traditional loans for many Utah residents with bad credit. They’re quick, short term loans designed to help you immediately. There’s minimal income verification and offer flexible loan options which can frequently be customized. And if you’re looking to purchase a new home, a hard money loan allows you to borrow against any home currently for sale. But are they really all they’re cracked up to be?
What Is A Hard Money Loan?
You may have heard hard money loans referred to as a “last resort” loan and felt immediately discouraged by its connotation. You shouldn’t be. A hard money loan is simply another term for a short term loan designed to bridge any gap for your immediate needs and provide you with funding based on the some type of tangible collateral such as your house or property. Not your credit score. Not your income. But the value of your house/property.
Hard money loans are offered in lieu of traditional loans by either private investors or smaller consumer lenders since terms (while frequently much more flexible than traditional loans) usually demand they be paid back in a shorter period of time—and at higher interest. Since lenders in Utah are subject to both Utah state and federal regulations which bar lending to homeowners who do not have adequate means of repayment, the amount of a loan which is predicated on your overall equity tends to be an attractive alternative for many people who find their credit is less than perfect.
Advantages And Disadvantages Of A Hard Money Loan
If you find yourself unable to pursue traditional loans, either because of bad credit, income or lien history, you may find hard money loans the perfect immediate solution. In fact, many private hard money investors have been in similar situations. And they know perfectly well how unsympathetic many banks are. They’re not faceless entities following standard protocol and regulations behind a computer screen. They’re people just like you, who have simply been able to dig themselves out of the financial dilemmas they once found themselves in. And because they’re people like yourself, they can offer much greater flexibility in repayment options than traditional financial institutions.
But lending is still a risky venture. Like anything else in life, the guarantee of repayment on a hard money loan can’t be taken on good faith alone. Which is why hard money lenders can’t always be the easiest investors to find. But not only is your property subject to resale should you default on your loan, payback terms can be frequently shorter. Depending on the size of the loan and your given situation, it can be three months or potentially three years; although, as noted, borrowers can frequently renegotiate—although it may require higher interest rates. Speaking of which…
Interest rates for hard money loans are typically much higher than traditional lenders. In Utah, the average interest rate has been estimated at 14.6%, compared to 4.48% offered by traditional mortgage refinancers. Since a hard money loan is a short term loan designed to assist you for an immediate situation (most hard money lenders will grant approval in 2-4 business days) this may be why they’re so frequently referred to as a “last resort.”
- Low Credit Requirements
The equity of your home is the decisive factor in a hard money loan—not credit history or income requirements.
Most hard money lenders will approve your loan in as little as 2-3 days.
- Greater Negotiability in Repayment Options
With a hard money loan, you can actually use collateral from other properties you currently have for sale. Terms are subject to both your given situation and the value of your home.
- Ideal for Short Term Solutions
Particularly if you’re looking to purchase another house with plans for renovating it for future sale (or “house-flipping.”) But if there’s a pressing medical bills, divorce or any other costly dilemma, hard money loans may be more ideal for you compared to traditional bank loans.
- Higher Interest Rates
As noted, sometimes interest rates can reach approximately 15 percent—and that’s not ideal for many people. But since most people applying for hard money loans are only going to be borrowing for 6 months to 1 year, it may ultimately be much lower than you’d think.
- Short Term Solution
Remember, this is a bridge to help you get out of an immediate gap. Hard money is not a long term solution and should definitely be thought of as a temporary cash flow source.
While hard money lenders are becoming increasingly more visible, they still have neither the time, presence or marketing departments as traditional financial institutions. You may find shopping around for the most ideal rate will be fairly limited.
Are Hard Money Lenders Reputable?
For the most part, yes. They may be private investors, but they’re just as much subject to legal regulations as traditional lenders. And even more scrutinized. Hard money lenders are still commercial entities. And no commercial entity wants to face prosecution—especially an alternative lender.
But with any legally binding agreement, review the contract carefully; with an attorney, preferably. Make certain there are no loopholes designed to take advantage of you if you’re considering a hard money loan. And always ask about the negotiability of available terms.
Or you can turn to your trusted local house buying professionals at Gary Buys Houses. We know how difficult it can be to borrow equity with bad credit. That’s why we established our Sell Now Move Later program. We’ve helped hundreds of Utah homeowners find an ideal solution to equity access dilemmas over the years. Why not let us help you as well?