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Hard Money Loan Definition, Benefits, and What to Look For
You need fast financing for your investment property, but you’ve hit a wall. The project itself is invigorating, but funding is a headache.
In May 2023, the National Association of Realtors’ Chief Economist reported small and regional banks tightening real estate lending policies, creating an added obstacle to quick funding. You’re stuck wondering, “what are hard money loans, and are they worth it”?
Before spearheading the construction of your investment property you need to understand your financing options. Otherwise, you could end up losing more capital than you earn. This happens quite often, so every decision is crucial.
If you want maximum profit on your investment, you’ll need to learn everything you can about hard money loans.
Let’s begin.
Table of Contents:
- What are Hard Money Loans?
- Hard Money Loan Requirements
- Hard Money Loan Process
- Hard Money Loan Interest Rates, Example, and Fees
- Pros and Cons of Hard Money Loans
What are Hard Money Loans?
Hard money loans are short-term and secured by real property – mostly used for fix and flip projects. They’re perfect if you need fast access to funds for your investment property. You might get a lower loan-to-value (LTV) than, say, a conventional loan or bank financing, but that’s a small price for convenience and timeliness.
Hard Money Loan Definition: A short-term investment loan secured by real property and offered by a private lender. Most commonly used for commercial building investments or fix and flips. |
Usually offered by individuals or real estate investment companies, these kinds of loans feature a much shorter funding time frame and payment terms are often negotiable. This is because they’re based on collateral (e.g. a house), instead of the applicant’s credit history. To compare, bank loans typically base loan approval and amount on the applicant’s credit report and personal tax returns.
While all hard money loans are short-term and secured by collateral, there are a couple categories to choose from:
- Hard Money Bridge Loans – Real Estate Investors use these to acquire or refinance properties that have not been stabilized yet. You can typically count on a 12-24 month loan period – just enough time to stabilize the property for permanent financing or sale.
- Hard Money Fix and Flip and Construction Loans – These loans include funds for rehabbing or building the property. These are also 12-24 month loans, and are designed to help investors purchase and renovate a property, or build from the ground up.
The convenience and speed are major upsides, but potentially higher loan to value ratios are also a benefit. For example, Revolution Realty Capital offers up to 85% LTV for fix and flip solutions.
Hard Money vs. Private Money
The most distinguishing factor between a hard money and private money loan is the use of a hard asset to secure the financing. Private money lenders can offer hard money loans – as well as an assortment of other options – and are not a public bank or financial institution.
Typically, hard money loans are offered through private equity lenders, but this isn’t always the case. Like hard money loans, securing a loan through a private lender also has many benefits, such as a shorter funding period, competitive interest rates, flexible financing options, and more.
Before sealing a deal with a private lender, make sure you’ve done your due diligence on the lender’s reputation. While private money offers a host of benefits, such lenders aren’t confined to the same requirements public institutions must stand by, and not all lenders are created equal.
Hard Money Loan Requirements
The first and most obvious requirement for hard money loans is your collateral. This will likely be the property you’re fixing up, as long as you have enough equity in it.
To be clear: you can’t secure a hard money loan with a property you don’t own.
Next, you’ll need an investment property down payment. Usually, the minimum will be from 30% to 40% of the loan amount for commercial real estate and 20% to 30% for residential properties.
Though, you can often find even better prices, with the right lender.
Finally, lenders will want to know about your exit strategy and how you plan to pay the loan back. Will you pay immediately after selling the property? Will you refinance the loan to buy more time? Having these details outlined ahead of time will prove that you are a reliable applicant.
Now that you know the requirements of a hard money loan, let’s explore the process of getting one.
Hard Money Loan Process
With traditional loans, lenders put applicants through a vetting process where credit scores, proof of income, and more are considered for approval. Hard money loans are completely different.
The stand-out feature of these loans is the speed of funding. If you’re investing in real estate, a quick turn-around is essential, which makes hard money loans perfect for opportunities like fix and flip properties.
It’s crucial to create a payment strategy. While hard money loans are fast and convenient, defaulting on the loan could cost you the property and any profit from selling it. Establish a plan to pay off your loan on time, even if the property rents or sells for less than expected.
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Next, make sure that you meet the hard money loan requirements. Collateral to secure the loan, your down payment, and a clear exit strategy are all necessary when applying. The most important part of this process is finding a reputable private money lender that you can trust to honor your agreement. Look for strong social proof like reviews and referrals.
Once you find your lender, you’re ready to start the hard money loan process. Most lenders have an application on their website. If you have everything prepared ahead of time, this should be the quickest part of the process. It usually takes one or two days for lenders to approve a hard money loan. A considerable benefit compared to the time it typically takes traditional lenders to approve an investment loan (usually around a week, sometimes longer).
Once approved, all you have to worry about is meeting the conditions of your loan within the agreed-upon timeframe. In most cases, funds are transferred within a couple of weeks.
But before you start the loan process, let’s go over what you can expect to pay for hard money loans.
Hard Money Loan Interest Rates, Example, and fees
Let’s say you buy a fixer-upper for $350,000 that needs $35,000 in rehab.
With a hard money loan, you could put a 20% down payment, which makes the purchase loan amount $280,000. With the $35,000 rehab, the total loan amount is $315,000.
Keep in mind that hard money lenders will likely charge a 2% origination fee for a new loan. Hard money loan interest rates also range from 10-15%. That’s an additional expense of about $37,800, over the life of the loan. Whether or not that’s reasonable depends on your budget and the value potential of the property.
Pros and Cons of Hard Money Loans
In the world of real estate investing, there are risks and rewards everywhere. However, seasoned investors know that the secret to large profits is carefully weighing the pros and cons. Here’s a chart to help you out.
Hard Money Loan Pro
Flexible terms
Hard Money Loan Con
Higher interest rates
Hard Money Loan Pro
Fast access to money
Hard Money Loan Con
Upfront costs
Hard Money Loan Pro
Lower priority on credit scores
Hard Money Loan Con
Risk of losing your investment
Pros of Hard Money Loans
- Flexible terms: Hard money loans are asset-based, so lenders will often negotiate terms if you have valuable collateral.
- Fast access to money: The entire process usually takes a couple of weeks.
- Low priority on credit: Poor credit scores won’t hinder you if you have enough collateral.
Cons of Hard Money Loans
- Higher interest rates: Interest rates are higher than a conventional or bank loan.
- Upfront costs: Lenders charge an origination fee of about 1% – 5% of the loan amount. This is in addition to interest and closing costs.
- Risk of losing the investment:
As with all loans, there’s risk involved. Defaulting on your hard money loan could result in losing your investment property.
Final Thoughts
The million-dollar question, “Are hard money loans worth it?”, has a very simple answer.
Maybe.
If you’re investing in a property and selling it in two years or less, hard money loans can be a great fit. These loans are perfect for fast and flexible financing. As explained in the hard money loan definition, such financing offers immediate access to capital quickly.
Whatever you decide, remember that your goal is to profit as much as possible from your investment. Be strategic, choose the right loan option, and partner with a solid lender to make that happen.
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- Taesent tincidunt vehicula ante, sed tempus libero vulputate.
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Daniel William
Co-Foundet Acme Corp
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