Op-Ed: Lowering the Risk Associated with Hard Money Lending

In short, a lender is approached by a potential borrower who needs money for real estate and / or renovations that should turn a profit once the property is sold. At this point, they can assess the plan, how the borrower will repay the money, and the feasibility of the whole project. If they determine that there is little or no risk at all, they can lend the money under certain conditions.

The whole attraction of these loans is that although they are more expensive, approval is easier than in banks. More importantly, the whole process is more flexible and faster, allowing for faster project development and return on investment.

In general, there is little risk if the lender covers all the bases up front and does not invest more than they can afford. Nevertheless, when deciding on a particular project, the lender should take into account the following factors:

  • How far they want (and can go) with the loan. Lenders are primarily concerned with the value of the property and generally don’t look for perfect credit scores. Yet they are not in this business to lose money. A smart lender will try to stay in the 65% to 75% range when it comes to the loan amount; they want to make sure they don’t suffer a loss in the end.

However, if other factors indicate more risk, interest rates and points are likely to go quite high. The numbers will be determined after a full evaluation.

  • How flexible they are. Since the standardized underwriting process is not a necessity, hard cash loan agreements are quite flexible. Still, the payment schedule and all the terms depend on the lender and whether they can go the extra mile for the borrower. Something that would help them decide on this is the fact that both parties have the same goal: profit. Therefore, it’s always a good idea to have a flexible deal that favors both.
  • How quickly they can fund the loan. The whole attraction of hard money loans is that the borrower does not have to wait ages to get approved. As for the banks, they wait weeks of waiting and there is always a chance that they will be rejected. With hard money lenders, however, the criteria are less stringent, and the payback is quick. If a lender is unable to provide the funds quickly, it will likely be difficult for them to find a good project to invest in.
  • If they want to assess borrowers like banks do. One of the advantages of hard money loans is that there is no need to sift through bank statements, examine the borrower’s income, and try to find anything in their past history. credit that could result in a higher interest rate. The hard money loan requirements are fairly straightforward to meet overall. The most important factors in the game are the value of the property and the potential profit.

Nonetheless, if one wants to do a more in-depth check, they can, although this can slow the whole process down a bit. Most of the time, it is enough to do simple checks and then make sure that both parties are on the same page about what they want from the project, the schedule, the feasibility, etc.

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