what are the advantages and disadvantages of taking loan from money lenders
Answers
money lender charges compound interest always where as in bank the amount of interest is comparatively low
Real estate investors who haven’t previously used hard money will be amazed at how quickly hard money loans are funded compared to banks. Hard money loans can be funded with 3-5 days if needed. Compare that with 30+ days it takes for a bank to fund. This speedy funding has saved numerous real estate investors who have been in escrow only to have their original lender pull out or simply not deliver. This is a perfect situation for a hard money lender to step in, provide financing quickly and save the deal.
2. Hard Money Loans Have Few Requirements
As discussed previously, hard money lenders have few requirements, especially when compared to bank loans. They include the borrower having sufficient equity in the property, enough cash on hand to make the monthly payments, a reasonable exit strategy and ample experience if needed. Fewer requirements means higher likelihood of loan approval. Banks have lengthy lists of requirements a borrower must meet in order to qualify for financing and are known for saying “No” more than “Yes”. Their list of requirements increases each year and many of them seem arbitrary.
Banks also have a list of issues that will raise a red flag and prevent them from even considering lending to a borrower such as recent foreclosures, short sales, loan modifications, and bankruptcies. Bad credit is another factor that will prevent a bank from lending to a borrower. Most banks will not lend to a borrower who already has 4 mortgages even if the borrower’s credit is perfect with no other issues.
Luckily for real estate investors who may currently have some of these issues on their record, hard money lenders are still able to lend to them. The hard money lenders can lend to borrowers with issues as long as the borrower has enough down payment or equity (at least 25-30%) in the property. This 25-30% equity is the security for the loan that ensures the borrower is going to make the agreed upon monthly payments and also make the balloon payment (usually via sale or refinance) at the end of the loan term.
In the case of a potential borrower who wants to purchase a primary residence with an owner-occupied hard money loan through a private mortgage lender, the borrower can initially purchase a property with hard money and then work to repair any issues or wait the necessary amount of time to clear the issues. Once the issues have been remedied, the borrower will be able to refinance to a lower cost loan with a conventional lender such as a bank or credit union.
Banks are also unwilling to provide home loans to borrowers who are self-employed or currently lack the required 2 years of employment history at their current position. The borrowers may be an ideal candidate for the loan in every other aspect, but these arbitrary requirements prevent banks from extending financing to the borrowers. A hard money lender would be able to provide a short term loan (1-3 years) to enable the borrower to purchase their property. In the case of the borrower without sufficient employment history
Top 3 Disadvantages of Hard Money Loans
While the speed, low requirements and flexibility of hard money loans ensures real estate investors have the capital they need to complete their projects, there are some aspects of hard money loans that can be considered less than ideal.
1. Hard Money Loan Interest Rates Are Higher Than Bank Loans
2. Hard Money Loans Are For Short Term Use Only
Most hard money loans are written for 1-2 years. Longer terms of 3-5 years are available but that is generally the upper limit for loan term length.
3. Hard Money Loans Require A Down Payment Or Equity Of At Least 25-30%
Some borrowers view down payments or equity requirements as a detriment that prevents them from obtaining a loan. Hard money lenders are able to look past many issues and shortcomings, but only because they are requiring sufficient equity in the property to act as security for the loan. “Hard money” uses the “hard” asset to secure the loan, while banks focus primarily on income, a clean credit report and FICO scores. With hard money, no down payment equals no loan.
Without a sufficient down payment or equity the hard money lender is essentially taking on all the risk. If the borrower only puts down a 5% down payment and receives a loan for the remaining 95%, a 10% drop in the property value would put the borrower at a 5% loss on the property. If the borrower thought the decline would continue or the property value would not increase in value in the near future, the borrower would have little incentive to complete the project and may abandon it, default on the hard money loan and leave it to the lender to clean up the mess. This is a worst case scenario for the hard money lender.
In a similar scenario where the borrower puts in a 30% down payment (instead of only 5%), a 10% decline in the value of the property still gives the borrower plenty of incentive to stick with the property and project to protect their equity.