A hard money loan is an asset-based loan that is secured via collateral. The borrower of said loan is given it based off the value of actual property, often real estate. Hard money loans mostly come from private investors, not banks or credit unions. As such, the focus for these lenders is the value of the property, not the credit history of the borrower.
The term “hard money” is used predominantly in the USA and Canada. This is where hard money loans occur most often. With hard money lending the loan amount is based on the value of actual property currently owned or being acquired by the borrower.
The concept was developed as a potential last resort for land owners who wished to gain capital against the equity of their owned properties. It can be applied to commercial, residential and industrial properties, as well as open land.
Who Is a Hard Money Loan Best For?
Loans aren’t one size fits all. You need to spend time researching the options out there to decide what is right for you. A hard money loan might not be what is best for you, but let’s check. Here are a few scenarios for which hard money lending is appropriate:
- You’re a buyer with bad credit
If you lack credit history, or have one you’d rather not talk about, you will struggle to get what’s considered a conventional loan. Banks and similar institutions will research your credit history to determine your ability to repay them. This is often a long and clunky process. Hard money lenders use the property as collateral for securing the loan. This gives them the ability to loan to those with questionable credit due to outstanding debts, foreclosure or other things that prevent you from getting a loan the traditional way.
- You needs to respond to a deal quickly
Time frame is one of the most valuable benefits of a hard money loan. Traditional bank loan approvals average 30-90 days. If you found the perfect deal on a property you know that it might not wait that long. A hard money lender can have your loan within a few days. If you’re an investor in the fix and flip market you know competition is fierce and quick. A short return on a loan request can make a huge impact.
- You need flexibility
With the breaking from traditional banking institutions hard money loans are capable of unique flexibility. They lack extreme regulations and are not behest to strict policies enforced by corporate headquarters. This empowers hard money lenders to negotiate terms and repayment plans most suited to the needs of the borrower. One of the major bonus items of this flexibility is the fact that the loan can be had with no down payment.
Why Would You Want a Hard Money Loan?
We covered this a bit above, but let’s delve into some detail. What are some benefits of hard money loans? Considerably less red tape to cut through! That is a BIG why! They’re particularly worthwhile for investors who work in the fix-it and flip it type of real estate.
The whole focus of that kind of real estate isn’t to live in the homes you purchase but to own them just long enough to use renovation to increase their value. If you’re not looking for a home, but a paycheck then this could be a good loan for you. A quick turnaround means you can repay the loan and realize a profit quickly.
Another reason you might want to go the way of hard money lending is an inability to be approved for a loan any other way. If you don’t have much to offer by way of credit the property itself can be your collateral. You’ll borrow no more than the property is worth, so the hard money lender knows there’s a fail-safe to their investment. This makes your personal credit history considerably less important.
How Do Hard Money Loans Work?
A hard money lender will use what’s known as a Loan To Value (LTV) ratio, lending you up to 50 – 75% of appraised value of your property. The loans will often be short-termed, typically around twelve months. However they can come between six months to two years, sometimes even five, depending on negotiations.
With the ease of obtaining hard money loans there comes higher interest rates. They often range between 10-18%. The increased interest rates make the decreased repayment period more appealing. No one wants to pay high interest loans longer than they have to.
Even so, hard money loans can be expensive. You serve yourself best if you research all the possibilities to acquire a loan and make an informed decision. You want to go with a loan that works best for you.
How Can You Get a Hard Money Loan?
Have property pre-selected. It can be commercial, industrial, single family residence, multi-family residence or open land. You should also have a renovation plan in mind. Gather all the relevant information including but not limited to: property cost, property value, renovation costs, your financial history, proof of income, and any property details.
Shop around for the best potential hard money lender and make your case with them. It should be a fast process so you can begin working on your project in no time!