Six Common Myths About Hard Money Loans

Six Common Myths About Hard Money Loans

Those looking for Austin hard money lenders may be faced with misconstrued myths about hard money loans. Today, hard money lending is becoming more mainstream in the real estate world. The biggest myth about the term “hard money” is that it means “hard to get,” but this is not true. Hard money loans, when paired with the right project, can be far easier to obtain than a conventional loan. Below are six common myths about hard money lending.

Myth 1: Hard Money Lending is Too Risky.

Hard money lending is seen as riskier than conventional loans. The last housing crisis was primarily caused by subprime lending. The crisis was compounded by conventional loans issued at over 100% of the loan-to-value ratio. With hard money lending, lenders use the after-repair-value of the property to determine the loan amount. Typically, a hard money lender caps the total amount of the loan to 70% of the after-repair-value of the property: This is a much less risky loan than being indebted to 125% of the value of the property. Also, hard money lenders deal with their own money. They are not financial institutions with vast resources. Hard money lenders have more involvement in their loans, so they are often more cautious.

Myth 2: Hard Money Equals Loan Shark.

An outdated description of hard money is describing it as predatory lending. This is a confusion of purpose and meaning. The flexibility and fluidity of hard money, on the surface, appears to fix terms in favor of the lender. This simply is not true. Hard money loans have the purpose of short term lending and quick origination. Flexibility is critical to achieving these goals. Unlike a conventional loan, a hard money lender can play with the house’s money. A lendee can pick up a property in a rising market with hard money. That lendee can add value to the property through renovation, pay off the loan, and have a sell a property valued at above the original cost plus interest.

Myth 3: No Way Out

This myth is founded in a loan practice known as loan-to-own. This is predatory lending, where the lender looks for loans with a high chance of default. This practice is not mainstream nor acceptable. Hard money lending is a billion-dollar industry nationwide. Those money seekers, looking at Austin hard money lenders, need to research to find the right lender.

Myth 4: More Expensive.

Again this myth fails to equate the purpose of a hard money loan. A hard money loan at its core is a business loan. The money is lent to create a return. Therefore, the added cost of hard money loans is part of doing business. A smart money seeker, factors there cost in just like other expenses. The interest rate for hard money is higher, but for a short period. The closing cost for a hard money loan is often more, but with an investment property, the quick access to capital can offset such costs.

Myth 5: Act of Desperation.

Quick access to capital is easy to confuse with desperation. For start-up property investors or multiple projects, tieing up all personal capital may not make good business sense. Hard money can be used to purchase the large expense item, the property. This allows other capital to be used elsewhere, where a higher return on investment can be found.

Myth 6: No Paperwork.

Hard money lending does not require the formalities of a conventional loan, but there is still paperwork. Hard money lending is not a handshake deal: There are terms and conditions that both parties have to agree too. These terms, with a reputable lender, are memorialized in writing.

Edward Powell