Among the many financial products, hard money loans are some of the most misunderstood. But there is no reason to allow mistruths and myths to continue about hard money loans.
Yes, hard money loans can be more costly than other collateralized products (like traditional mortgages or home equity loans). But the reality is hard money loans were not designed to compete with these conventional or government-backed loans. Hard money loans were specifically developed to meet an unmet financial-market need and are now offered for very specific purposes.
Private or hard money lenders located in Georgia (or across the country) typically specialize in making hard money loans and entice potential borrowers with the application of less restrictive guidelines when underwriting the hard money loan for approval. In essence, by reducing the paperwork requirements (and/or overlooking lending scenarios that would result in a loan rejection for a traditional mortgage), hard money lenders fill an unmet lending niche – funding lending scenarios that would otherwise be considered non-fundable or not bankable.
As a result, private lending becomes a win-win situation for both the lender and the borrower, who:
- Needs financing for a difficult (if not impossible) to fund property.
- Needs financing quickly or for only a short amount of time.
How do hard money lenders determine an approved loan amount?
Hard money loans are fundamentally underwritten based on the value of the property being offered as collateral – i.e., the subject property. Each hard money lender or private lender will set forth their own underwriting guidelines as to the maximum loan-to-value that will be provided to a borrower under any specific hard money loan program.
While many people believe that hard money lenders will lend 100% of the property’s value, this is a myth that needs debunking. Additionally, while lending guidelines have been relaxed (for the reasons mentioned above), hard money loans generally require basic paperwork to reach the closing table.
The Bottom-Line
Hard money loans are an excellent option for specific borrowers but may not be suitable for other homebuyers. There are many prudent reasons to consider using a hard money loan to finance a property; however, borrowers should speak with a mortgage professional or their financial advisor before making final financial decisions.