Hard money loans are one way for real estate investors to acquire the money they need for purchasing properties. Under these contracts, monthly interest is charged until the loan is paid in full. These pacts come with certain advantages and disadvantages that real estate profiteers should understand before signing an agreement. Here are a few characteristics of hard money offers that must be recognized.

Hard Money Advantages

Speed is a major reason these loans are desirable. The application process is simple and money can be provided within a few days. Traditional mortgages sometimes take up to three months to complete.

Hard money lenders do not take credit scores or debt into consideration. In fact, your lender may offer to provide you with the entire amount you need without a down payment. Under most traditional bank loans, you need to pay a minimum of 5 percent of the loan’s total cost upfront.

If a negative credit history prevents you from establishing a connection with a traditional bank, hard money lenders present the opportunity to get a financial relationship under your belt. Once you have worked with a hard money lender, you may be able to secure better terms on future agreements. With enough activity, securing a line of credit from more established lenders can become possible.

Hard Money Disadvantages

Interest rates that come with hard money loans are extremely high. Lenders are able to get away with charging higher rates because they know their borrowers typically have few options. Expect to pay between 10 and 20 percent of the amount you receive.

Because of their inherently risky nature, hard money lenders have a strong incentive to protect themselves. To do this, they charge more than established banks. Origination fees, for instance, are often much higher. In some instances, providers charge five times more than traditional moneylenders.

Loans of this nature are not long-term solutions. Rather, they act as a bridge between more sustainable financial agreements. Expect your loan to come due within a few years or even months. The penalty for missing your deadline could be an even greater interest rate.

Because you are not putting up additional collateral, failure to pay off your loan could result in the property being repossessed. This is embarrassing for any aspiring real estate tycoon.

Hard money loans are often a great solution for those in financial binds but they come with significant drawbacks. Learn the positives and negatives of these deals prior to accepting one.