One of the biggest drawbacks of hard money loans is that they require borrowers to make a nonrefundable earnest money deposit. These funds are required in order to secure the loan, and many lenders do not require any other information from borrowers. Another drawback of hard money loans is that the repayment period is often much shorter than traditional mortgages. This means that borrowers should consider the time it takes to repay the loan before proceeding.
Because hard money lenders are not regulated, they require extra due diligence and documentation. You should seek legal counsel and make sure that the lender explains fees and the repayment schedule in full. The borrower should also avoid using his or her credit history, as a poor credit score will make it difficult to obtain a hard money loan. Although borrowing from family members might be an easy option, it can put strain on relationships.
If you have a good credit history, a hard money lender may be willing to lend you as little as 10% of the total value of the property. You should pay careful attention to the repayment schedule as some lenders may only finance a portion of the loan, so be prepared for this. You should always be in contact with the hard money lender, as they might move on to the next applicant without contacting you.