Hard money loans are a trendy type of financing option for real estate properties. They are a preferred choice among business owners and investors who need funding on an urgent basis. Such loans revolve around asset-based loan financing.
The borrowers here receive the required funds by securing the value of the real estate. The hard money loans are generally issued by private investors or companies that work entirely different from the traditional methods. It is why the interest rate for hard money loans is higher than the conventional financing options.
The hard money loans are taken when the borrower fails to secure adequate finances from the banking institutions. They are mostly used for short-term projects, which means they last between a few months to a couple of years.
However, the criteria can be reviewed considering the situation of the candidate and the lender. But generally, most hard money lenders Dallas TX qualify for such loans on the value of the real estate property. Therefore, it is the primary guideline for loan evaluation.
To offer a hard money loan, the professionals first assess the risk associated with the property and the current value of the real estate. Then, after considering all the essential criteria, they see if the loan can benefit them.
When there are some drawbacks, the lender will not give the loan. Here are the top five types of loans hard money lenders will never offer.
Types of hard money loans that the lender can never offer
Under different circumstances, the lender will not agree to provide hard money loans. However, some of the typical loan types include.
1. Loan against soft assets
The hard money loans are sanctioned against the hard assets. The term hard money means that the lender keeps the asset as collateral while offering necessary funding for the project. Hard assets can be intangible, physical assets like real estate property. At the same time, a soft asset is intangible, like a patent or stock.
Hard money lenders under no circumstances will agree to offer the fund against a soft asset. Besides, lenders avoid private equity, seed capital, and startup financing.
Despite this, there is a great demand for private equity funding, which the hard money lenders decline all the time because the collateral offered here is a stock which is a non-physical asset. Remember, the hard money lenders Illinois provide debt but not equity.
2. Loans with no exit strategy
Another common situation wherein the hard money lenders can decline the funding is when there is no exit strategy. The hard money loan is a short-term financing option that comes with a higher interest rate. It means there must be a good exit strategy for the lender. The borrower must know how he has planned to pay back the amount he is taking as debt for the project.
Before the lender offers the loan amount, they ask the borrower about the plans to pay back the exit strategy. When there is no viable strategy, the lender will decline the financing.
3. 100% LTV loans
Typically, government-backed loans require no money down, but most lenders will not offer financing at 100% loan to value. There is a common misconception that hard money lenders provide the finances at 100% LTV.
Still, in reality, the lenders love the property more conservatively than traditional lenders. Besides the hard money, lenders require a larger down payment than the conventional financing options.
The specification excludes the lenders on a fix and flips to lend the financing for improved value or future value of the project. However, the lender will offer only a certain percentage of the approved loan. It is simply because the hard money loans come with a greater risk for the lenders who make the lending decisions based on the assets.
Unlike the traditional means, which are the banking institutions that take tax returns to identify the borrower’s credibility to repay the loan, the hard money lenders only rely on the assets to determine the loan repayment rate.
The hard money lenders can never offer financing to a borrower merrily on his dream. However, this is precisely what most borrowers have to present. Although it might be an inspiring dream, it cannot help them get the finances.
The hard money lenders look at three prime criteria for approving the loan: the 3 C’s, including cash, collateral, and character. The collateral here is obvious, while money refers to the amount a borrower can put in to purchase a property or the cash he already has put into the real estate.
Finally, the character here refers to the borrower’s track record or experience with a specific real estate property type being used as collateral for the loan.
For instance, a borrower might not have adequate cash, but he can present good collateral and character in the form of experience with previous dander or specific property type. In such instances, good character and collateral can help the borrower get necessary financing despite the cash.
In contrast, when the borrower has good collateral but no experience or cash, which happens in rare cases, the hard money lender can approve the loan early on the collateral offered.
5. Consumer loans
A consumer loan is typically used for household purposes. The residential property occupied by the borrower comes under the category of consumer. The new consumer mortgage lending laws are complicated due to the complex disclosures and other requirements. It is why the banking institutions have turned away their focus from mortgages and have started finding different types of consumer debts.
Concerning the lending laws, the borrowers who can fail to qualify for the loan seek other options for their home loans. However, they soon realize there are very few options available from the heart money lenders.
The residential property comes under consumer loans, which the hard money lenders cannot offer. After all, the licensing and regulatory requirements of the consumer loans are pretty overwhelming for the private lenders who have limited resources to meet the need and purpose.
Hard money loans are an excellent means to fulfill the urgent requirement of an investor or businessman. However, there can be some instances wherein the lenders will defer from offering the financing despite this. It would help if you kept in mind such cases and better prepare yourself with the other financing options to ensure you benefit from the available opportunity.
You can consider contacting Private Capital Investors to get the right help. We have years of expertise in helping investors get the best deals and offers for their real estate investments.
Our professionals will guide you about the hard money loans and their applications. With the assistance, there will be a better chance of securing a loan required for your purpose.
We will try our best to help you secure a loan. If no we can work together to help find some other options that can suit your requirement. So, instead of avoiding it, better contact us to get all the help you need to secure the loan and make your investment profitable.