In recent years, hard money lenders have become a much more mainstream source of financing. Experienced investors are understanding the beneficial differences—whether it is speedy closings, flexibility, or inside knowledge—between hard money and conventional lenders that make hard money loans a better choice for their projects. Myths that have always surrounded hard money loans are slowly being dismantled as more hard money lenders make a name for themselves and more investors turn to hard money lenders for the capital their business needs to succeed.
Today on the Rules of Thumb blog from MoneyThumb, we are bringing to light and debunking 6 common myths about hard money lending. These are listed below, with a retractor to explain why each one is a myth and not reality:
Myth #1--No Documents Needed To Get a Hard Money Loan
Fact: Though hard money lenders are more lenient than conventional lenders when it comes to documentation, the basics are still essential for a borrower’s loan qualification. Hard money lenders require documentation to evaluate the risk associated with the project and set loan terms accordingly, as well as to protect both themselves and the borrower from potential legal challenges. The more well-prepared a borrower is, the faster the loan process becomes.
Myth #2--Hard Money Borrowers Are Desperate
Fact: For the most part, hard money lenders will overlook certain shortcomings in a potential borrower's financial history or experience—for example, their credit score. However, many borrowers often come to hard money lenders with a credit score that is considered bankable. Essentially, most potential borrowers are choosing a hard money loan over a conventional loan, not using it as a last resort. Borrowers decide to apply for a hard money loan for these two key benefits: the types of loans being offered as well as the lenders’, closing speed, and flexibility. Smart investors tend to see leveraging hard money as one of the necessary tools to grow their investing business quickly and consistently.
Myth #3--Hard Money Loans Are Too Risky
Fact: Since hard money lenders are often lending their own money to borrowers, they are less likely to approve truly risky deals that will leave themselves and the borrower with less than what they started with. Plus, a good local hard money lender is situated where they lend. This means that they have advanced insight into their local markets, so they will know when a deal is too risky or just “risky enough.” For the most part, if you and your deal look promising on paper, a bank or conventional lender will quickly approve your loan—even if in reality the project is not set up for success. Hard money lenders take the time to evaluate your project as best they can to ensure your success.
Myth #4--Hard Money Loans Are More Expensive
Fact: Technically, hard money loans are more expensive than conventional loans because of their higher interest rates and other closing costs. But for most investors, hard money loans are simply seen as the cost of doing business. However, hard money loans may save you money in other ways. Remember: time is money. Hard money loans often have shorter terms, quick approvals, no-prepayment penalties, and are flexible with borrowers’ timelines. Shorter loan terms also mean that you can pay off the loan faster and pay less lifetime interest.
Plus, many banks will only provide 50-65% of the total project costs, while hard money lenders usually offer 80-90%. So, you may end up paying more in total expenses, but you will be investing less of your own money into the project as a whole.
Myth #5--Hard Money Lenders Are Loan Sharks
Fact: False. This is somewhat of an outdated depiction of hard money lenders. Nowadays, there are billion-dollar hard money lending companies that lend all over the country and are as legitimate as banks. Most hard money lending companies—even small ones—are well-established and reputable. However, like any industry, there are less reputable players so always be sure to do your homework before bringing on a new lending partner.
Myth #6--You Don't Need an Exit Strategy
Fact: This misconception most likely stems from the far and few “loan to own” hard money lenders—ones all borrowers should avoid. These types of lenders seem to want your investment to fall through so they can take your collateral.
However, a reputable hard money lender wants to hear a borrower’s exit strategy. Having a strong exit strategy is part of proving your reliability to a lender. The most common exit strategies include: selling a property you are financing, or refinancing into a longer-term mortgage and holding the property for rental income. Your exit strategy must match your collateral as well as your own abilities and history.