First time homebuyers likely have heard about conventional loans, FHA loans, fixed-rate mortgages, and adjustable-rate mortgages. But maybe they’re not aware that private money loans are another option to purchase or finance their home.
Since hard money loans are often associated with business purposes or are called “last resort” loans, buyers may not even know they’re eligible to qualify with a hard money lender.
Worst yet, potential borrowers who have heard about hard money loans may have been scared away from the idea because they suspect hard money loans are a trap or scam, or are even for only desperate borrowers.
In this article, we cover the top five hard money loan myths to dispel any doubts you may have about hard money.
Hopefully after reading, you’ll understand that hard money loans are simply an alternative funding option available to people to purchase or finance their next property.
Myth 1. Hard money loans are only for people with bad credit
Hard money loans have a reputation as being the last resort option for people who can’t get a traditional mortgage from a bank or conventional lender because of bad credit.
While this may be true for some clients, there are plenty of reasons why homebuyers and real estate investors turn to hard money over a conventional loan:
- Drastically faster approval and closing rates, so you can get your loan faster
- Fast access to cash to bid on properties as they come available
- Higher approval rates
- No credit requirement
- More flexibility in their requirements
- Marquee Funding Group has no limit to the number of loans we can issue to a borrower
- Hard money loans can be used to purchase or refinance a property
Because most traditional mortgage lenders are government-backed banks, they are usually unwilling to offer loans to people in unique financial circumstances.
Not just limited to people with poor credit, hard money loans are becoming more popular with people in these circumstances:
- Freelancers and independent contractors with irregular income
- People with large gaps in their employment history
- Recent college graduates with high incomes, but little work experience
- People whose debt-to-income (DTI) ratio is too high
- Real estate investors and fix-and-flippers who need a bridge loan to secure new properties quickly
- People who have no credit
What’s your loan scenario?
Myth 2. Hard money lenders don’t offer consumer loans
Private money loans in the past had a reputation as being inaccessible to the average homebuyer, and were only used by real estate developers and landlords to secure business purpose loans.
Most hard money lenders prefer offering business purpose loans, because these loans are used to buy commercial real estate, multifamily units, and other real estate investments that generate a profit for the borrower.
What sets Marquee Fund Group apart from other private money lenders is our ability to offer both consumer and business purpose loans. This includes owner-occupied and non-owner-occupied properties.
Because of our ability to offer consumer loans, we can help people purchase or refinance their homes when other financial institutions are unwilling to help.
Myth 3. Hard money loans must be paid off within a year
People often think that hard money loans must be paid off within 12 months. This is not always the case.
Business purpose loans’ term lengths vary from 12 – 60 months and will depend on the negotiated terms that have been worked out between the hard money lender and the borrower.
Each loan scenario is unique, and the details of that deal will dictate the right term length that works for the buyer and seller.
Once a borrower and lender relationship has been established and the borrower has repaid their loans, terms can become easier to negotiate. That’s one of the key benefits of working with a private money lender — a trusting work relationship.
Smart investors tend to become repeat customers because of the ease and quickness of securing a hard money loan.
Also, many people aren’t aware that consumer purpose can have loan terms of 10-30 years, just like a traditional bank loan.
Another benefit of consumer hard money loans is the ability to pay off the loan early without prepayment penalties.
Myth 4. Hard money lenders are loan sharks
Hard money lenders use the property you’re purchasing as collateral in case of borrower default. This is done to protect the lender’s money and ensure they’re not loaning money out to people who can’t pay them back.
Because of this, there’s a misconception that hard money lenders are loan sharks, hoping for their borrowers to fail so they can take ownership of the property.
This could not be further from the truth — the hard money lenders don’t want to deal with the headache of foreclosure and selling off the property to recoup their losses.
Hard money lenders seek a win-win situation — they loan to people who need help purchasing or refinancing a property. The borrower gets access to quick cash to secure that property and the lender is paid back with interest.
It’s not in the lender’s or borrower’s best interest to create risky deals.
While hard money loans are often easier to get approved, lenders and their underwriters still want to make sure the borrowers are able to pay back their loans.
Every loan scenario is different, and the merits of each loan are evaluated so both the borrower and hard money lenders can benefit from the deal.
5. Hard money loans are drastically more expensive than traditional mortgages
People often think that hard money loan interest rates are drastically higher than traditional mortgages.
While the rates for hard money loans are higher, they’re not nearly as high or unreasonable as many people believe.
The average mortgage interest rate for traditional mortgages is around 4.5%, whereas hard money loans at Marquee Funding Group range between 8% – 13%.
Because hard money lenders are willing to work with borrowers who may have poor credit or unique financial circumstances, these risks can be offset by charging a higher interest rate.
While the interest rates for private money loans are higher, the ease of use, flexibility, and quickness in securing a loan compensate for the higher interest rates.
Because of the fast-closing times for getting a hard money loan, many real estate investors are willing to pay a slightly higher interest rate in order to get the money in a relatively short period of time, usually in under 10 days.
Get started with a reputable hard money lender
Marquee Funding Group is a premier private lender offering a wide variety of loan products that other private lenders can’t compete with.
We are one of the few private lending groups offering consumer-purpose, owner-occupied, and long-term loans to help everyday people purchase and refinance their homes.
We want to work with you to help you purchase or refinance your next property.
Submit your loan scenario to our team today.