In order to understand why turning to hard money lenders is preferable to borrowing from the government, it is important to understand the real purpose of hard money loans.
Many believe that this type of loan is destined to people with bad credit, but they could not be more wrong. Even if the private lenders do not necessarily check the clients’ credit score, on the long run, the loan is not suitable for borrowers with low credit score.
Private lenders and hard money loans are indeed a better option than government loans, but only for real estate investors. Hard money loans were designed primarily for them, not as a last resort solution for people with poor credit.
Real estate professionals go to hard money lenders when they need cash on hand in the shortest time possible. Most of them use the money to rehab a low cost property and then put it back on the market with the added value. Real estate investors know that time is of the essence in the housing market and a property that takes long to sell will cost them a lot of money. And this is the exact reason why they do not apply for government loans.
While the latter are more advantageous, interest-wise, obtaining a loan from the government takes a lot of time and paperwork. The process is both long and energy consuming, and real estate investors need to move fast in order to make profit. Once a property is purchased, the renovation works need to start as soon as possible, and that takes money that would take months to be obtained through a government loan.
Hard money loans, on the other hand, are much easier to obtain, so no time is wasted. Having the cash available, the real estate investors can start the rehabilitation works considerably sooner, and, consequently, have the house on the market within a shorter period of time.
For these privileges, most of them are more than happy to pay the higher interest rate hard money lenders ask for – after all, although the interest is high, since the money is only borrowed for a short amount of time and the profit is considerable, the costs are quite convenient.