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Debunking the Most Common Hard Money Loan Myths That Exist Today

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Published in Business Articles

A hard money loan is a type of financing in which a borrower secures money through real property. For instance, a real estate “flipper” may apply for one to cover their future project, putting that project up as collateral.

Most of these loans are distributed by private lenders or investors, rather than banks or credit unions.

While other types of loans hinge on your creditworthiness, this isn’t the case with a hard money loan. Though they’re often considered risky, these short-term agreements can work for the right people. Today, we’re sharing (and debunking) a few of the most common myths surrounding this type of loan.

1. You Can Get a Hard Money Loan Without Documents

If you need emergency cash, then you may have encountered some unscrupulous lenders who offered a cash money loan, no questions asked or documents needed. While this kind of easy transaction might seem ideal, think about the agreement you’re entering into.

A reputable lender like DFW Hard Money will require some kind of documentation, although these terms tend to be a little more lenient. That’s why it’s best to come prepared with basic identification, as well as details about the project. Your lender will evaluate these items before setting your loan terms.

If you want to expedite the loan process as much as possible, then reach out to your lender before your meeting. This way, you can rest assured that you’re bringing all the necessary documents when you arrive.

2. Hard Money Loans Are Overly Risky

There’s always some degree of risk involved in any type of loan. This includes hard money loans, but there’s an important aspect to keep in mind. Usually, hard money lenders are distributing their own money.

For this reason, they’re unlikely to enter into any deal that feels extremely risky. Doing so could mean that both parties ultimately lose money!

Plus, experienced lenders are usually well-versed in the local market, and they know how to gauge a low-risk deal from a high-risk one. They will spend time reviewing your project in detail to make sure it’s a good fit.

3. Hard Money Loans Are Too Pricey

Any type of fast personal loan will cost a little more than a traditional loan. This is because there will usually be interest rates and additional fees added onto the initial amount.

However, most investors who pursue this type of financing already have other business costs to account for. This is an additional one that can provide real benefit to their project. One way it can do so is by quickening your timeline.

It can take weeks or even months to be approved for a loan at your bank. On the other hand, you can usually earn a hard money loan approval much more quickly. In addition, these loans tend to have shorter terms and more flexibility.

If you want to pay off your loan early, most lenders will allow you to do so without tacking on a penalty fee. This allows you to pay back the loan quicker so you can start saving your money and making it work for you.

4. Hard Money Loans Are a Last Resort

Think that only desperate borrowers seek out hard money loans? This isn’t the case. While many lenders will look past minor issues with a borrower’s credit score or financial history, that doesn’t mean only the non-creditworthy will apply.

Rather, most of the time borrowers approach these lenders simply because they can get the ball rolling quicker. As soon as they receive their funds, they can move forward with their project. While you might pay a little more for that flexibility, it can make all the difference in your timeline.

5. Hard Money Lenders Are Scammers

Do you have a negative view of hard money lenders? In some outdated circles, you may have even heard them called “loan sharks”. While this might have been an accurate depiction years ago, it’s far from the case now.

Many modern hard money lenders operate on a massive, global scale and are just as trustworthy and legitimate as the bank on the corner. They’re well-respected in their communities, and they’ve earned a solid reputation. Most lenders in this niche have backgrounds in fields like real estate, finance, or law.

These are competent professionals who know how to run businesses and manage risk. If you’re unsure about a particular lender’s legitimacy, then you can read online reviews to see what others are saying.

6. Hard Money Loans Have Complicated Rules

Think they got their name because it’s so hard to secure hard money loans? Not quite. In fact, there aren’t any hard rules that govern their distribution. Each lender will establish his or her own set of standards and regulations.

Take the time to meet with different vendors and make sure you understand all of their rules before moving forward. For instance, you may find that one lender charges a low interest rate, but asks for collateral you don’t want to part with. Another may charge a higher rate but requires a different type of collateral.

This is why it’s important to meet with a few prospective lenders before selecting one.

Should You Apply For a Hard Money Loan?

A hard money loan can be a great resource if you need money to help fund a project or assist with another purchase. While there are many different lending options out there, it’s worth considering, especially if you need money as soon as possible.

Before signing on the dotted line, make sure you understand all of the loan terms, including the repayment timeline and any extra fees you’ll be required to pay.

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