Hard Money Lending VS. Traditional Lending

The Difference between Hard Money and Traditional Lending

Hard money came into existence when credit scores did not allow people to get loans the traditional way. This opened up a new business where you get the cash, but through an alternative channel. This does not mean that it is illegal; rather the business takes on a new approach when it comes to giving loans. What makes hard loans more interesting is the fact many prefer this way rather than traditional ways because of several factors.

A Small Matter of Documents

Traditional loan companies and banks require you to submit a whole lot of papers. Then there will be a thorough examination of the papers and only when all is in order will the loan be given. All that is required for hard loans is healthy collateral which can be sold off to cover the loan amount in case of failure of repayment.

Due to the drop in real estate business during the early 1980s and 1990s, the LTV rates were reduced. One can expect to around 65%-87% of the property value. If the LTV rates get any higher, then the risk is on the lenders side. There are some companies which give full documentation loans, light documentation loans and even no documentation loans.

Time Element

The traditional way is a long route which takes time as the intensive red tape cannot be bypassed. To make the risk factor less, the lenders will make sure that all is in order and of course, this takes time. Moreover, various factors such as credit score and history will have to be checked, and sometimes, even double checked as the three credit agencies will have different entries. Quick and easy are the keywords here, and one does not have to wait for long. In fact, one does not even have to wait to know whether their loan application will get approved for it is guaranteed as long as the property value is good.

Interest and LTV Rates

Traditional lenders keep low interest rates as the risk ratio is less. As the risk is less, the LTV rates are high. The interest rates are higher but the monthly installments are low provided that you can pay back the entire amount before the loan period ends. The LTV rates went down after the real estate crash from 1980-90. The high interest rate and the low LTV ratio are to protect the lender as the loan is given based only on the collateral.

The Verdict

Whatever way you look at it, hard loans are the easy way out. You can get bridge loans and residential rehab loans from hard money lenders. The lenders are prompt and usually accept any form of credit. They are very flexible and offer various types of payment options. Hard loans are preferred in commercial sectors as they can pull a person or a business out of a fix within a week. This is the only type of loan you will need to get.

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