What Is Hard Money Loan ?
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A hard money loan can be simply explained as a specific non-traditional way of loan financing that needs to be backed by an asset or a property. The term “hard money loan” is used exclusively in the United States and Canada where these loans are increasingly popular among borrowers who are unable to obtain loans from any of the traditional sources such as banks or other financial institutions.
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Hard money loans are provided by private lenders and are particularly used for generating capital in case of a commercial real estate transaction. Some even consider hard money loans as an excellent option for gathering funds in order to acquire or construct any commercial property.
Obtaining a hard money loan is easy and fast since it does not involve any verification of financial documents or project proposal. In most cases, one can obtain the loan within 24-48 hours of submitting the application.
The biggest disadvantage of a hard money loan is that lenders charge much higher interest rates in comparison to other conventional personal loans. Higher interest rates on hard money loans are a way to compensate lenders for the risk involved because these loans are provided to customers irrespective of their credit ratings and FICO scores. Hence, property owners use these loans as a last alternative.
Apart from interest rates, lenders also require the borrowers to pledge their property as collateral against the loan. The loan amount is determined based on the actual value of the property, a factor known as loan-to-value ratio. Typically, hard money lenders tend to provide loan up to 75 percent of the actual market value of the property. Borrowers can pledge assets any type of asset as a security including commercial building or a vacant land.
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