Hard money lending continues to grow in popularity. In spite of this increase, there are myths that cause people to remain skeptical of a lending practice that provides benefits and advantages that traditional financial institutions do not.
- Hard Money Loans Strip Borrowers of Control
This is a myth that dogs those lenders who need a partner in order to raise the capital needed to close on a property if a traditional loan was used. Instead, with a hard money loan, money is borrowed against the value of the property itself. This enables a borrower to retain absolute ownership.
- Hard Money Loans are More Expensive
Traditional lenders typically underwrite loans for 50% to 65% of the project’s total cost. This means the borrower needs to find additional funding elsewhere. For large projects, this task can quickly become expensive.
Alternatively, a hard money loan is usually issued for 80% to 90% of the cost for the borrower. Though interest rates are higher for hard money loans, the borrower retains total ownership when it comes to cash flow in the future. This type of arrangement can offer a borrower a more attractive rate of investment.
- Private Lenders are More Difficult to Work With
It’s true: traditional financial institutions provide consumers with a standardized approach to nearly every product they offer. During these conservative economic times, however, this makes it more difficult for banks to extend capital to those projects that don’t fit into neat little boxes.
Hard money lending offers a more flexible option and a streamlined process that benefits unconventional loans. While banks based their decision making on income, hard money lenders look for other signs that the project is worth the risk. Unlike banks, too, private lenders can accommodate an increase in funding due to design changes or other reasons.