Pros and Cons of a Hard Money Loan
Pros
One advantage to a hard money loan is the approval process, which tends to be much quicker than applying for a mortgage or other traditional loan through a bank. The private investors who back the hard money loan can make decisions faster because the lender is focused on collateral rather than an applicant’s financial position.
Lenders spend less time combing through a loan application verifying income and reviewing financial documents, for example. If the borrower has an existing relationship with the lender, the process will be even smoother.
Hard loan investors aren’t as concerned with receiving repayment because there may be an even greater value and opportunity for them to resell the property themselves if the borrower defaults.
Since the property itself is used as the only protection against default, hard money loans usually have lower LTV ratios than traditional loans: around 50% to 75%, vs. 80% for regular mortgages (though it can go higher if the borrower is an experienced flipper).
Also, the interest rates tend to be high. For hard money loans, the rates can be even higher than those of subprime loans.
Another drawback is that hard loan lenders might elect to not provide financing for an owner-occupied residence because of regulatory oversight and compliance rules.