Is Hard Money The Answer When You Have Declared Bankruptcy?
Businesses that have declared bankruptcy can face a challenging road back to the regularly lending scene. If you search online for loan alternatives, sooner or later you’re going to run into the concept of hard money.
Hard money is a direct loan from an investor to an individual or business for the purpose of buying and developing real estate. The terms of a hard money loan are usually very specific to the investor extending the offer.
We’ll take a look at whether hard money is a good loan of last resort.
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Can You Get Hard Money With A Bankruptcy On Your Record?
In theory, yes. Whether the hard money lender is willing to take a risk on a borrower with a bankruptcy on their record will depend on a number of factors, including the lender’s appetite for risk. Usually, hard money lenders are more concerned with the opportunity presented by the property than they are with your credit. You should, however, expect this type of lender to check your credit even if they weigh other factors more highly.
In most cases you’ll have to wait until your bankruptcy discharges before hard money lenders want to touch you; this will happen more quickly if you filed Chapter 7 than Chapter 13. In some cases, you may be able to be able to convince your Chapter 13 trustee and a hard money lender to work with you, but don’t count on the lender wanting to take on that kind of risk.
One of the bigger challenges of getting hard money is finding hard money lenders. Because you’re dealing with real estate, you’ll generally have to work with investors who have an interest in developing property in your area. Your local real estate association might be able to help you find hard money lenders in your region.
What Are The Limitations?
A hard money loan is a non-traditional loan made by regular investors to (effectively) real estate investors. Since the loan is secured by the property you’re buying or developing, there are practical limitations on how you can use the money.
Here are the things hard money is typically used for:
- Purchasing Real Estate: Hard money is often used to buy real estate in situations where traditional lending would be too slow.
- Improvements And Renovations: A hard money lender who is more interested in the potential of the property rather than its existing state may write a loan for a developer interested in making capital improvements.
- Construction: Hard money can be used to build new projects. As in the case of renovations, the lender will be interested in the potential value of the property.
There are a number of other potential uses, though most involve either improving or stabilizing the value of a property or circumventing the restrictions that come with bank lending. Since hard money loans don’t have the complex underwriting process of bank loans, some developers find them useful for quickly closing time-sensitive deals.
Should You Get Hard Money If You Can?
If you were recently underwater with debt, you may want to think twice about getting a hard money loan. You’re looking at double-digit interest rates and significantly higher origination fees to get your project off the ground.
These loans aren’t meant to be long-term financial solutions. The ideal use for hard money is to increase the value of the property in question, then flip it or refinance it. You don’t want to get bogged down by hard money’s high-interest rates over the long haul, or you could easily find yourself back where you were before.
Even if you’ve had a bankruptcy, you can dive back into the borrowing scene almost immediately after it resolves. Hard money is just one of your options. It’s costly, fast, and has narrow applications. If, however, you’re in a situation where you have a good investment opportunity and a well-developed exit-strategy, hard money can be a road back to solvency after a bankruptcy. If you’ve had experience with hard money, especially after a bankruptcy, we’d love to hear about it.
Not sure where else to look for loans? Our guide can be a good place to start.