4 Reasons Hard Money Is Impractical for Consumer Needs
Online discussions of hard money are often confusing because people compare hard money loans to consumer loans. Not only are the two types of funding intended for different purposes, but they also target different types of customers. Needless to say, they are not one in the same.
The thing about hard money is that it is completely impractical for consumer needs. In fact, that’s why hard money lenders don’t fund consumer purchases. You will not find a hard money lender offering residential mortgages. Hard money lenders do not finance cars, boats, and RVs.
Hard money is intended for commercial borrowing needs. As such, it is structured in a way that favors real estate investors, business owners, etc. Even if a hard money lender were willing to fund consumer needs, the way loans are structured would make doing so impractical.
Here are four reasons hard money is impractical for consumer needs:
1. Extremely Short Terms
At the top of the list are the extremely short terms that hard money loans are known for. Lenders insist on short terms to mitigate their risks. They want to get in and out quickly. How quickly?
Actium Lending, a Utah hard money lender based in Salt Lake City, explains that the average hard money loan has a term of 6-24 months. A 36-month term is possible under certain circumstances, but going beyond 36 months is unheard of.
Can you imagine trying to pay down a mortgage in just two years? It would be impossible for most people. It is one of the reasons hard money lenders don’t offer residential mortgages.
2. Interest-Only Structure
Hard money lenders trade short terms for an interest-only payment model. Most hard money loans are structured as interest-only vehicles, allowing borrowers to get by with less expensive monthly payments for the duration. They pay the entire principle at the loan’s maturity date.
Once again, imagine an interest-only mortgage with a maturity date two years down the road. How many homeowners would be able to come up with hundreds of thousands of dollars in cash to repay what they borrowed? Not many.
3. Lower LTV Ratios
Hard money lenders utilize loan-to-value (LTV) ratios just like traditional lenders. They will only fund a certain percentage of the total value of whatever is being acquired. Here is the thing: hard money LTVs tend to be substantially lower than their traditional counterparts.
Most consumers struggle to come up with a down payment of 25% for a residential mortgage. Imagine having to come up with 50%. It’s not unheard of in hard money. Lower LTVs are intended to reduce the lender’s risk. Your average consumer simply cannot swing them.
4. The Need for an Exit Plan
Finally, hard money lenders generally require an exit plan before they approve a loan application. An exit plan is a reasonable plan for paying the entire principle on its due date. According to Actium, one of the more common exit plans is refinancing a property hard money was used to obtain.
Asking a consumer to come up with a reasonable exit plan on a loan with the term is short as 24 months is asking a lot. Most consumers have a difficult time projecting their finances six months down the road, let alone for two years. A reasonable exit plan just isn’t in the cards.
Hard money is a valuable funding option for commercial needs. It is wholly inadequate for consumer needs. So next time you read a post describing why hard money loans are so bad for consumers, remember this: they aren’t intended for consumers. They are intended for commercial borrowers.
