When I joined Rock East Funding about five years ago and started meeting investors, I got one of two reactions when I met investors. The first reaction was “Oh great, you’re a lender. Tell me about your terms.” The other reaction was the opposite – “ohhh….you’re a hard money lender.” That reaction was from people who felt it’s a “shady” business where investors get “ripped off.”
Like any industry, unfortunately, there certainly are unscrupulous players in the Hard Money industry. However, if you are working with a reputable lender, Hard Money can be key to fueling your growth and success.
So, let’s dispel some of the Hard Money Myths:
Myth #1 – Hard money loans are excessively expensive
The most important myth to dispel about hard money loans is that they are excessively expensive. The truth is, hard money loans are actually quite reasonable when you compare them to other types of financing. For example, credit card interest rates are often 15-20% and other “cash advance” loans can be just as high.
The Truth About Hard Money Loan Interest Rates
The interest rate on a hard money loan is higher than a conventional home mortgage because the lender is taking on more risk. We are lending you money on a property that has no rental income, is undergoing a lot of construction, and that you will not be living in. All of these factors add to the risk. If you crunch your numbers right, Hard Money interest rates are just another cost of getting your deal done.
Myth #2 – They’re called hard money loans because the terms are hard to negotiate or approve
Many people believe that the reason hard money loans are called “hard” is because the terms are hard to negotiate and getting approved is difficult. This is not true. The term “hard” actually comes from the fact that these loans are backed by a “hard asset.”
The Truth About Hard Money Loan Terms
The terms of a hard money loan are not difficult to negotiate. They are typically based on the borrower’s experience, credit score and the “Loan To Value” which is the amount you are borrowing vs. the value of the property. Understanding the terms is pretty simple.
In addition, getting approved for a loan is much simpler than a conventional mortgage. Tax returns and pay stubs are not required. The lender will evaluate your credit history and your ability to repay the loan. We will also look at the property you are looking to purchase and determine if it is a good investment. If you have a good credit history and a solid investment plan, you should have no problem getting approved for a hard money loan. A hard money loan can typically be approved in less than 10 days.
Myth #3 – Hard money lenders hope you fail so they can take your collateral
Another misconception surrounding hard money loans is that the lenders hope you fail so they can take your collateral. Unfortunately this is true for some lenders. But for reputable lenders, this could not be further from the truth!
Hard money lenders actually want you to succeed so you can pay them back and they can get their money back plus interest.
The Reality of Hard Money Lenders
Hard money lenders are not ‘out to get you’. We are simply trying to minimize our risk. This is why we typically only lend money to people with good credit and a solid investment plan.
If you default on a hard money loan, the lender can take your collateral, but this is not our goal. The goal is for you to pay us back and make money on your deal. A “win win” for everyone – that’s the best kind of business transaction.
While there are a lot of misconceptions about Hard Money loans, the truth is that they can be a great option for real estate investors who need access to capital quickly. Rock East Funding understands that every business is different, which is why we offer a variety of loan products to choose from. With years of experience in this market, we are here to answer any questions you may have about getting started on your next real estate project. Give us a call today!