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Hard money lending is a type of asset-based financing. These are loans borrowed against real assets. The assets are sold to recover the borrowed money if the event of a default. Hard loans are not offered by traditional financial institutions such as banks; there are provided by individuals and private institutions. Any individual or institution that offers hard money loans is known as a Los Angeles hard money lender. They are also referred to as private lenders.
Hard money lenders primarily offer short to medium-term loans. The maximum amount that one can borrow from a private lender is determined by the lender’s Loan to Value Ratio(LTV). The LTV is the maximum percentage of the collateral’s present value that the lender loans. For example, if a borrower presents collateral worth $1000 to a hard money lender whose LTV is 75%, the maximum loan that the person can borrow is $750. Most hard money lenders’ LTV range between 65% and 75%. Private lenders employ licensed appraisers to establish the value of the collateral.
One of the most distinctive characteristics of hard money lenders is the emphasis on the value of the collateral rather than the creditworthiness of the borrower. Traditional lenders such as banks use creditworthiness to determine the amount of loan they will offer. To establish the creditworthiness, they evaluate the borrower’s financial history and current financial position. Though the traditional lenders also require collateral, they have a higher LTV than hard money lenders.
Hard money lenders do not have fixed LTVs. The ratio varies from person to person depending on how much the lender trusts the borrower. It also varies with the repayment time. Short term loans have a higher LTV than long-term loans. Furthermore, the nature of the collateral determines a lender’s LTV. The idea behind hard money lending is that should the borrower default, the lender should easily sell the security to recover the money. Due to this, the LTV rarely exceeds 75%. It is also the reason why assets with equal value might attract different LTVs.
Hard money lenders charge higher interest rates than conventional lenders. This is so because hard money lending presents a higher risk. The lack of through creditworthiness tests exposes hard money lenders to the risk of default. Though the loans they offer are secured, no lender wishes that buyer fails to pay. Selling the collateral to recover the loan is difficult than it sounds. Besides troubles with finding a buyer, the lender might have to go through time-consuming legal battles.
Like the LTVs, most hand money lenders have no fixed interest rates. The interest charged predominantly depends on the borrower’s negotiation skills, the relationship between the borrower and the lender, and the size of the risk.
In the USA, hard money lending became prevalent in the 1950s. During this time, state and federal institutions amended the borrowing rules making them more stringent. The hard money lenders pounced on that opportunity and offered loans with fewer conditions. The hard money lending business is mostly unregulated. The US recession of 2008 impacted the growth of hard money lending. The crisis was blamed on reckless mortgage lending by financial institutions.
Following the crisis, mortgage originators were required to toughen the mortgage qualification process. Though hard money lending has grown significantly since 2009, many hard money lenders avoid mortgage lending. Today, most hard money lenders finance business and commercial ventures only.
Hard money borrowing is more expensive than traditional borrowing. Nevertheless, more and more people are taking loans from hard money lenders. The business has grown by exploiting the weaknesses of conventional money lenders. Most people turn to hard money lenders for instant loans. It is almost impossible to get a sizable urgent loan from traditional financial institutions. They must take you through the time-consuming process of credit evaluation. In contrast, obtaining a loan from a hard money lender is fast and straightforward; provided that you have collateral.
Hard money lenders have flexible terms. They do not have a fixed underwriting process. The lending terms can be tailored to suit the borrower’s needs. To get a loan from traditional borrowers, one must demonstrate their ability to pay. They must have a good credit history and a sustainable income to debt ratio. All these requirements make people turn to hard money lenders for loans. The most common challenge facing hard money lenders is defaulting. To overcome this problem, some hard money lenders have started doing background checks to ascertain the creditworthiness of borrowers.
Hard money lenders do not advertise their services as rigorously as traditional lenders. In fact, most hard money lenders offer their services locally. Nevertheless, the world has gone digital, and you can find hard money lenders through the internet.