Four Reasons Why Hard Money Loans are Flourishing

Hard money or private money loans are geared towards borrowers seeking short to medium term loans who have a poor or adverse credit history, or those who cannot meet the strict underwriting requirements of most banks for income and/or assets. They can only be sourced through private money lenders and are secured on the basis of a specific piece of real estate. When a hard money loan is made, the borrower agrees to give the private money lender a lien on the real estate, which is pledged as collateral for the loan. Hard money loans are becoming more common these days, and the market is truly flourishing. There are a number of reasons for this change with the main ones being:

Mutually Beneficial to Investors and Borrowers

Hard money loans, also known as private money loans, are routinely extended at much higher interest rates than banks offer and are typically only available on a short to medium term basis. However, despite the higher rates and the ostensibly unfavorable terms to borrowers, hard money loans are gaining in popularity as they provide borrowers financial flexibility. The returns to the investor or lender are high and for borrowers, it’s an opportunity to take out a much needed loan when other financial avenues are closed to them.

The Only Viable Option

A lot of people have seen their incomes shrink due to the 2006-2009 recession and resulting rampant unemployment. Although the economy is beginning to show signs of an upturn, the fact remains that many consumers have been placed in a bad financial position due to the recession. The net result is that a fair amount of consumers today are plagued by bad credit and are unable to qualify for standard loans with traditional banks due to their poor credit rating. However, private money loans offer many consumers a way to get back on their feet by leveraging the equity in their real estate. In this day and age, a hard money loan may be the only means by which many people can acquire a loan, handle their affairs, and then seek a more favorable loan at a later date.

Equity Counts

A hard money loan can be taken out for a variety of reasons. Banks give out loans primarily on the basis of factors such as credit history and debt to income ratio, which can put a lot of people out of the running for a traditional loan, particularly if they are self-employed. Investors who engage in private money lending and specialize in hard money loans are typically more concerned with the borrower’s equity in the real property to be used as collateral rather than their credit history. This makes hard money loans a reasonable option for people with poor credit who still require access to capital.

Significant Investor Returns

From the investor’s perspective, hard money loans are very favorable even with the inherent risks. Hard money loans, also known as trust deed investments to investors, are always calculated at higher interest rates than those loans provided by banks. In addition, the loans are extended on a much lower LTV ratio, meaning that the lender always has a strong equity cushion in the leveraged property to mitigate the risks inherent in the loan. As an investor, the returns on hard money loans are significantly higher than those to be gained on more traditional forms of investment.

In our current economic situation, hard money or private money loans are one of the few options to raise sources of financing for those hurt by the economic recession. Conversely, private money loans can be good investments for investors by increasing their capital base, increasing their cash flow, and helping them in retirement. Hard money loans are definitely on the upswing in this challenging economy, and while the demand for private money loans rises and falls like any industry, private money will always be around for those borrowers with unique needs.