There are a lot of great things that make hard money lending the right choice for certain types of borrowers. But not everything about hard money is sunshine and roses. And in fact, there are legitimate reasons to not even think about trying to get a hard money loan.
This post discusses three such reasons. None of them have anything to do with higher interest rates in shorter terms. Do the math and it becomes clear that higher rates and shorter terms are not the big deal they are made out to be. And in fact, shorter terms all but nullify the impacts of higher interest rates.
While you let that rattle around in your brain for a while, here are three reasons to not even consider hard money lending:
1. You Lack Valuable Collateral
At the very top of the list there is a lack of valuable collateral. Why does this matter? Because collateral is everything in the hard money game. Salt Lake City’s Actium Lending explains why.
Hard money lending is private lending. Actium is a privately owned firm that bases approval decisions on asset value. Imagine a typical borrower, a real estate investor hoping to use an Actium loan to finance his latest purchase. The property he is after acts as collateral to back up the loan.
The property needs to have enough value to cover the amount the borrower is asking for. If it doesn’t, his loan application will be denied. The same goes for you. Obtaining a hard money loan will require that you put something up as collateral. If you have nothing of value to offer, your application will not even be looked at. Don’t waste your time.
2. You Are Looking to Buy a Primary Residence
The second reason to not even consider hard money lending boils down to the purpose of the loan. If you are looking to purchase a primary residence you intend to live in, forget hard money. That’s what bank and credit union mortgages are for. Hard money lenders are not interested in mortgage lending, nor are they allowed to practice it.
Hard money lending is almost exclusively for commercial purposes. If you are a real estate investor purchasing residential properties to add to your rental portfolio, you are conducting a commercial enterprise. You could possibly get hard money loans to fund new purchases. But purchasing a home you intend to live in is a completely different thing. It is not business, it’s personal. Hard money lenders won’t touch it.
3. Your Financial Understanding Can Be Questioned
Rounding out our list of reasons is your own financial understanding. It’s true that hard money loans are easier to obtain than their traditional counterparts. Lenders look primarily at asset value to inform approval decisions. But they do look at other things, including the borrower’s understanding of financial matters.
A lender needs to be reasonably sure you know what you’re doing before approval will be granted. So let’s say a lender is looking at a real estate investor with a history of failed investments and very little cash on hand. The two things combined suggest the investor could be too much of a risk.
If your financial understanding is limited, hard money probably isn’t right for you. Spend some time learning everything you can and utilizing other forms of funding to meet your financial needs. Over time, you could become a very good hard money borrower. For now, you’re not.
And there you have it: three reasons to not even consider hard money. There are more, but these drive the point home well enough.
