Hard money lending, sometimes also known as bridge lending, represents a unique take on the conventional money lending structure commonly used by banks and other financial entities. The main difference between a hard money loan and a conventional loan is that hard money loans are asset-based. That means that the value of the loan is founded on the property you are choosing to back the loan with, rather than your credit history and income.
What Kind of People Benefit Most from Hard Money Loans?
These loans exist to cater to a specific segment of loan-seeking population – primarily investors and commercial property real estate professionals. They are especially advantageous for people or companies who are repairing a property for sale and need a quick influx of cash in order to finish the project.
They are not designed for:
- Homeowners;
- Individuals who cannot qualify for a credit-based loan;
- People with poor credit;
- People who would benefit more from a long-term, low interest rate conventional loan.
These kinds of people become interested in this type of loans because of the fact that they can often be made without strict adherence to the rules that the individual’s credit score would imply. While this may seem attractive at first, it is not ideal and will not end up providing the solution that a homeowner with poor credit is seeking.
Hard money loans exist to help investors rehab homes and get them onto the market efficiently. The loan is based on the value of the property for this reason – the fact that your individual credit score is less important is just a product of this foundation, and makes sense in context.
Flipping a Property with Hard Money
The ideal situation in which you would want to take out a hard money loan would be when flipping a home or commercial property: having bought the property at low cost, you take the loan to renovate the necessary elements and you re-introduce the property to the market a short time thereafter. This way, you can sell at profit, pay back the loan and escape the interest rate without worrying about your credit.