A hard money loan is one that is backed by what is considered a “hard” asset, including real estate. If you are an investor or a house flipper and are looking for a loan, a hard money loan may be a good choice for you. So what exactly is hard money, specifically?
Hard money is a type of lending option that is commonly used in real estate investing. A hard money loan is sometimes known as a bridge or asset loan. These loans are used for short-term financing, and the loans always get secured by some sort of asset. A traditional financial institution won’t offer a hard money loan, so this option can only be done through an individual investor or a private lender.
Hard money loans are an easier and quicker way for you to make an investment purchase without having to worry about the approval process or go through traditional financing methods. Because these types of loans are based on assets, they will not be contingent on the creditworthiness of the buyer.
When does it make sense to take out a hard money loan?
The idea of this type of loan is to renovate, secure or develop a property to then ultimately turn around and sell it for a profit. A hard loan might be chosen over a conventional loan due to the easy process of obtaining the funds. There are lending options from financial entities, but they are usually complicated and rely heavily on the borrower to approve them. A hard money loan is great for home investors, it is an asset-based loan usually secured through a mortgage, and because of this, the approval process is a lot faster.
Even so, a hard money loan isn’t the catch-all solution for everyone. If you take out a hard money loan, you will be paying an extra premium for the convenience of it. Alongside this, they have higher percentage points than a traditional loan and may rack up more fees and other such costs. The closing costs on the property will usually be higher when you complete a hard money transaction, too.
Another drawback to think about is the repayment period and how it is shortened. A hard money loan often depends on a swift return on investment for the person lending the money. The term of the loan rarely goes over 24 months, and in a lot of cases, this type of loan is required to be paid back in as little as 12 months.
What are the interest rates and points on hard money?
Hard money lenders will usually charge the borrower a fee just for giving the loan. These fees are known as “points.” With a hard money loan, points are usually equal to one percent of the loan, but they can be as high as two to four percent. Interest rates on hard money loans can change depending on the deal and the lender, though many lenders will usually provide a loan with a fixed interest rate. In some cases, you may be able to negotiate the interest at a floating rate. Typically, a hard money loan brings with it an interest rate between 10 and 15 percent. This all depends on the lender, as well as what they consider to be the calculated risk of the potential loan in question.
What are the borrower’s requirements for hard money loans?
Since hard money loans are given by companies and private individuals, the loan requirements can be different depending on the lender. Even so, because the borrower usually deals right with the lender, there is more room for negotiation. If it’s your first time going after a loan, you will probably have a more difficult time getting approved, and you may need to give additional information to the lender that a more experienced investor may not have to. Most lenders will look at the borrower’s history of investment, confirm the property values for the assets and even require a 30 to 40 percent down payment to get the loan.
Final Thoughts
Hard money loans can be a great way to get a real estate investment secured. House flippers, real estate investors, rehabbers and developers often use this type of loan because it’s an easy, fast way to get financing. Compared to a typical loan, the interest rates are usually higher, but the higher rates are usually balanced out by the way the borrower can get access to the funds a lot faster. The loan is also based primarily on the asset that is being purchased instead of the personal credit or approval of the borrower.
When you are searching for a hard money lender to work with, make sure you choose a reputable company, one that has a long history of handling these kinds of loans, so you can trust them with your assets.
