Hard Money Lenders: What You Need to Know

November 10, 2020 | Erin Behan

Hard money lenders provide an alternative to getting real estate financing from banks. For many property investors, hard money loans have benefits. Here are the pros and cons.

When it comes to real estate investment financing, you have options beyond a traditional bank lender. One of those options is a hard money loan. A hard money loan is a short-term loan that uses property (or a “hard” asset) as collateral. Instead of coming from a bank, these funds come from private investors or a private investment fund.

A hard money loan may come from a variety of hard money lenders. Hard money lenders tend to specialize in property flipping, multifamily rental properties, or on a specific region.

How does a hard money loan work?

Hard money loans differ from conventional bank or credit union loans in several ways. For one, a hard money loan has a much shorter term—anywhere from a few months to a few years. Generally, you pay interest only, with a balloon payment of the principal due at the end.

What’s the appeal of a hard money loan?

Hard money loans appeal to real estate investors. In particular, investors who plan on flipping their properties often have a few good reasons to work with hard money lenders. In fact, even celebrity flippers commonly use hard money loans. 

Speed: Hard money loans can be secured in as little as a week. 

Amount: With hard money, you can borrow against the After Repair Value (or ARV) of a property. Let’s imagine you want to buy an investment property for $100,000. You estimate that you can sell the property for $150,000 after fixing it up. A hard money lender may let you borrow up to $150,000 (minus any down payment the lender requires). 

Volume: It’s possible to secure more than one deal at a time from a hard money lender.

Flexibility: Hard money loans do not work under banking rules and regulations, allowing them to offer more flexibility. That may mean little or no money down, a less rigid reliance on credit score, and a willingness to work with your individual situation. However, hard money loans are generally less flexible than a private lender like a friend or business associate.

What are the terms of hard money loans?

Hard money lenders structure their loans differently than conventional mortgage loans. Expect higher interest rates compared to traditional loans, usually from 7% to 15%. Points, or the charge for originating a loan, tend to be higher on hard money loans than with conventional loans, generally at least 2% of the total loan amount. You’ll also pay processing and underwriting fees. Most hard money loans require an appraisal since the property is the collateral. Expect to pay appraisal fees. Depending on the loan, there may be a penalty for paying the loan off early.

How to choose a hard money lender

Hard money lenders have specialties, so it’s important to find the right one for you and your situation. If you’re flipping a home, look for a hard money lender that specializes in such deals. In any lending situation, shop around for the right deal for your property investment needs. Some online portals, like the Scotsman Guide, list options. Here are some things to look for in a hard money lender:

Good reputation: Just as with any lender, not all hard money lenders are scrupulous. Start with recommendations from people you trust who’ve done business with hard money lenders. Look for industry groups, such as the National Real Estate Investors Association for guidance. Thoroughly vet any hard money lenders you decide to work with.

Streamlined process: A main benefit of hard money lending is speed. If a hard money lender requires excessive documentation or drags the process out, then you may want to look elsewhere.

Reasonable fees: Fees beyond the normal bank mortgage are in the nature of hard money lending. But make sure the fees in your deal are not excessive and are in line with other similar lenders. Look beyond the interest rate being offered to the total of fees assessed. Have a lawyer with a specialty in hard money contracts look over your paperwork before you sign. 

Offer the money you need: If you can’t get the amount of money you need for your project, you may need to find a new lender. Consider why the lender doesn’t have faith in the deal and adjust your purchase price or estimated revocation costs.

6 reasons to choose a hard money loan

You should consider a hard money loan if you:

  1. Need access to money fast to finance an investment property.
  2. Want to buy an investment property that won’t qualify for a traditional loan.
  3. Need to borrow money to fix and flip an investment property.
  4. Plan on reselling the investment property in months (not years).
  5. Don’t want to finance your investment property with a large down payment.
  6. Have less than perfect credit and you want to buy an investment property.

Why a hard money loan is not right for you?

Working with a hard money lender isn’t for everyone. Make sure hard money is appropriate for your situation. For example, if you need money for the long term or for a primary residence, you might want to look elsewhere for financing. Further, if you don’t expect to quickly recoup the money that you plan to borrow, you probably shouldn’t pursue a hard money loan.

Most investors who opt for hard money loans value the speed with which the money arrives and the ability to borrow against the ARV. These positives often outweigh higher interest rates and extra fees. For many real estate investors looking to flip homes on a quick turnaround, a fast payback schedule works well. If it’s your first flip or you’re planning on taking your time with a renovation, you may want to explore other real estate investment financing.

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