Hard Money Loans
When a private lender grants a loan to a borrower on the basis of the value of his property and not on the basis of his creditworthiness, it is called a hard money loan.
The origin of its name was due to the fact that the borrower got hard cash immediately. However, over the years it has come to mean ‘a loan hard to repay’.
Construction Hard Money Loans
A construction hard money loan is a loan which provides funds for improving an existing building or for a new construction. The collateral for construction hard money loans is the improved value of the existing building or the value of the new building.
Importance of Construction Hard Money Loans
In a situation where immediate money is required for construction purposes, it is not possible to get a loan from banks or financial institutions as they take a long time to approve them. Even subprime loan lenders hesitate to grant these loans. A person constructing a new building for his business or land developer would suffer a loss if there is a delay in the project. Such people find construction hard money loans very beneficial as they can start project execution without any delay.
Features of Construction Hard Money Loans
- As the name suggests, these hard money loans provide money for construction purposes
- They are secured real estate loans. However, unlike other hard money loans, the collateral is not the existing property but the improved value of the property after construction.
- Like all hard money loans, these loans carry a high rate of interest, maybe even as high as 16%.
- The loan to value ratio is quite low. To safeguard him, the lender generally grants a loan not higher than 65% of the collateral value.
- The lender would want to lend from first position – that is, he would want to have first lien on the collateral. This means that in the event of foreclosure, the lenders of construction hard money loans would want to recover their dues before any other creditor.
- These loans are taken for a short term, generally for a period of one year. In fact, it is just a temporary arrangement made by the borrower till he gets a formal loan from a bank or financial institution. This is because taking construction hard money loans for a long period of time would prove to be expensive. Also, a person taking this loan needs to plan his exit strategy for it once.
- The work of construction does not happen all at once. So the construction hard money loan amount is granted not in a lump sum but in stages.
Online Construction Hard Money Loans
Searching for construction hard money loan lenders could be difficult. The advent of the internet has helped to solve this problem to a certain extent.
- Selecting a lender from another town or city would make the loan more expensive. This is because the lender may not be familiar with the borrower’s city and hence may charge higher interest to reduce his risk. One can now search the web for construction hard money loan lenders in one’s town or city.
- An online search for individual lenders would mean multiple data entries as the borrower would have to fill in his details in each lender’s website. An easier way would be to select a site which has tied up with a number of lenders. So a person wishing to borrow construction hard money loans would have to fill in the required data only once and a lender willing to grant him a loan would contact him.
Construction hard money loans though expensive, provide instant money required for real estate projects where a time gap would lead to huge losses.