What is Hard Money Lending?
A hard money loan is a short-term bridge loan. Primarily used in real estate transactions, its terms are based mainly on the value of your property being used as collateral, not on the creditworthiness of you, the borrower. Banks do not make hard money loans; hard money lenders are often private individuals or companies that see value in this potentially risky venture.
The cost of a hard money loan is typically higher compared to financing available through banks or government lending programs, due to the higher risk that the lender is taking. However, the increased expense is a tradeoff for:
- faster access to capital
- a less stringent approval process
- flexibility in the repayment schedule.
Hard money loans are solutions for turnaround situations, in short-term financing and by borrowers with poor credit but substantial equity in their property. Since it can be issued quickly, a hard money loan is a means to stave off foreclosure.
How a Hard Money Loan Works
Fix & Flippers use hard money loans planning to renovate and resell a project, often within one year, if not sooner. Investors buying to Fix & Hold also use the hard money loan. The higher cost of a hard money loan is offset by the borrower paying off the loan relatively quickly. Most hard money loans are for six months to three years. There are other advantages they offer.
A hard money loan, usually taken out for a short time, is a way to raise money quickly, but at a higher cost and lower LTV ratio.
Advantages of Hard Money
- Some loans will not only cover the purchase price of the property but also include up to 100% of the rehab costs. Typically the rehab costs are done in three phases/draws. As work is completed and inspected, and a draw will be issued.
- The approval process for a hard money loan is often much quicker than applying for a mortgage or other traditional loan through a bank. Private investors can make decisions faster because they often do not make credit checks or examine a borrower’s credit history. They do not have to follow the steps lenders usually take to investigate an applicant’s ability to make loan payments. These investors are not as concerned about receiving repayment because there may be even higher value and opportunity for them to resell the property themselves if the borrower defaults.
- Hard money lenders do not use a standard, underwriting process, but evaluate each loan on a case-by-case basis. Applicants can often negotiate adjustments regarding the repayment schedule for the loan. Borrowers can angle for more opportunities to pay back the loan during the window of time available to them.
- Unlike standard financing, a lender can get a hard money loan with no credit, even bad credit.