Why Hard Money Is Not Really for the Most Desperate Borrowers

Hard money lending is an established form of private lending that has served a certain segment of the economy very well over the last several decades. Unfortunately, it is often mischaracterized as lending for the most desperate borrowers. It’s anything but, yet some people just will not be convinced.

Perhaps this misunderstanding is related to the fact that hard money lenders don’t put much credence in credit scores and histories. If you were to request a hard money loan from Actium lenders, the Salt Lake City-based firm would not run a complete credit check on you prior to making an approval decision. There are more important things than credit histories and scores.

The Basics of Hard Money Lending

Actium explains that hard money lending is asset-based lending. What does this mean? It means that approval decisions are based primarily on the value of those assets a borrower puts up as collateral. Given that the vast majority of hard money loans go to real estate investors, the properties those investors are targeting tend to act as loan collateral.

Collateral backs a hard money loan. So a lender is less concerned about a borrower’s credit score as long as the collateral has enough value to cover the amount being borrowed. Think of it as a trade of sorts. The borrower trades the targeted property for a certain amount of cash.

This sort of transaction is possible because hard money loans are structured as trust-deed transactions rather than mortgages. The borrower maintains day-to-day control over the property, but he doesn’t own it until the deed is transferred into his name. Meanwhile, the trustee agrees to transfer the deed to the lender should the borrower default.

Desperate Borrowers Aren’t Investing in Real Estate

Getting back to this misunderstanding about desperate borrowers, they typically are not the people investing in real estate. Mention a desperate borrower and most of us will think of an unemployed person with plenty of debts and no money to pay them. It might be a person whose car has been repossessed or who has been turned down for a mortgage because his credit rating is so poor.

Not for Consumer Transactions

Actium Lending points out another important fact: hard money lending is not designed for consumer transactions. Lenders do not approve hard money loans for residential mortgages, new cars, dream vacations, etc. Hard money is for commercial transactions. That means real estate investments, business expansion, mergers and acquisitions, capital improvements, and the like.

Not only are real estate investors not desperate borrowers, but they also actually prefer hard money because it’s fast and hassle free. Borrowers don’t have to jump through hoops to get approval. They also do not have to wait for months while lenders complete the underwriting process.

This idea that hard money targets desperate borrowers is a myth. Hard money plays a key role in commercial real estate and business growth. Without it, borrowers would have to adapt to the inconveniences and hassles traditional financing is known for. Fortunately for them, hard money is both accessible and a lot easier to obtain.