Are you looking to buy a house to flip or use it as a rental property? You’re probably having a hard time getting a traditional mortgage for it, especially if your credit score isn’t necessarily something a traditional lender would approve of. If you need quick cash it might not be wise to go to traditional lenders. In these situations, you might want to consider turning to hard money loans Connecticut.

But first things first.

What is a Hard Money Loan?

Hard money loans are short-term loans that require the property you’re purchasing as the collateral. Banks don’t offer hard money loans: these types of loans are only offered by alternative lenders like private companies and individual investors. Hard money lenders tend to overlook poor credit scores and other factors, and usually base their decision on the property that’s being used as collateral.

Although you end up skipping a few steps ahead to get a hard money loan, there are risks that come with this type of lending option. This might not be the best option for a lot of people.

People who usually take out hard money loans are:

• House Flippers– House flippers buy and remodel old houses and sell them off for a higher price. They buy fixer-uppers to rehabilitate them in exchange for a hefty profit. In some cases, house flippers might use hard money for both purchasing and repairing the house.
• Real property investors– Real property investors can turn to hard money loans as a means of quick cash source to finance deals.
• Business Owners– Business owners might take out hard money loans to buy commercial real estate when they fail to qualify for traditional financing.

Benefits of Hard Money Loans

There are a number of benefits borrowers can get from hard money loans. They are as follows:

• Faster than traditional loans –hard money loans just take a few days to be approved from start to finish. This is why a lot of people prefer them when they need quick cash.
• The underwriting process is less complicated compared to traditional loans –this happens because hard money lenders usually focus more on the value of the property used as collateral rather than the borrower’s financial status or history.
• They don’t focus on a borrower’s credit score or debt-to-income ratio –this is because hard money lenders do not have to abide by the same regulations that traditional lenders follow.

These are just some of the reasons why hard money loans can be quite an attractive option for those who do not qualify for a traditional loan. However, these loans come with a risk and it’s important for you to consider all the dangers they expose.

Risk Involved in Hard Money Loans

While there are benefits that come with hard money loans Connecticut, borrowers must also be aware and consider the risks, such as:

• Higher Interest Rates –hard money lenders usually charge higher interest rates because this kind of lending option has more risks than traditional ones.
• They might require a higher down payment compared to traditional loans –as we have mentioned earlier, there is more risk to this which is why hard money lenders take this precaution.
• They usually have shorter loan terms compared to what’s offered by traditional loans –although regular mortgages can be repaid over the course of at least 10-30 years, hard money loans have to be repaid in at least one to three years.

Considering all the risks mentioned above, it’s safe to say that a hard money loan can be a more expensive (and riskier) way to borrow money.

Should You Get a Hard Money Loan?

Whether or not you should get a hard money loan will depend on the situation you are in. regardless, it’s important that you consider all the pros and cons before you sign up for a hard money loan.

Like with any debt, it’s important that you have a plan on how you can pay it off before you borrow. You wouldn’t want to lose the loan’s collateral (the property you bought) just because you were unable to carry on with the monthly payments.

Aside from losing the losing the property you put as a collateral, you can cause serious damage to your credit score when you default a hard money loan.

The outcomes from both situations can leave you worse off financially than you were before—and it might also affect your ability to borrow money again.

When You Should Avoid Hard Money Loans

If you need reasons to explore other alternatives to hard money loans, here are a few good ones:

• You’re uncomfortable with the risks associated with it—most notably the loss of the property you put as collateral.
• You’re not sure you can pay off the hard money loan in a short period of time.
• You have a good credit score and it won’t be hard for you to qualify for a traditional loan with lower interest rates.

Good alternatives to hard money loans are home equity loans, traditional mortgages, loans from friends and family, or financing from the property’s seller.

That said, if you’re still interested in getting a hard money loan and do not think the risks are that bad, below are some tips on how you can get one.

How to Get a Hard Money Loan

It’s not actually hard to find a hard money loans Connecticut lender. However, be careful and don’t borrow money from just anybody. You must consider other factors such the reputation and interest rates offered by the lender.

Once you’ve decided on a hard money lender, be ready to:

• Prepare the down payment, which is usually larger than what down payments for traditional mortgages cost
• Prepare all the necessary paperwork, like proof of income
• Hire a lawyer to go over the terms of the loan after approval
• Come up with a strategy on how you can pay off the loan

Conclusion
Like any loans, make sure you go over the pros and cons of hard money loans before you sign the paperwork and commit to borrowing. Maybe you’ll find hard money loans to be the best borrowing option for you, or you can always find an alternative. No matter what type of loan you decide on, you should check your credit score and credit report to get an idea of where your finances stand.