Hard Money Loans

Hard money loans refer to a type of financing that is provided by private investors or lending companies, as opposed to traditional banks. These loans are typically secured by the property being purchased and are considered a higher risk option due to their short-term nature and higher interest rates. Hard money loans are often used for quick, short-term funding for real estate projects such as property flipping, rehabilitation, or bridge financing. The loan approval process for hard money loans is usually faster than traditional banks, making them a popular option for real estate investors who need funding quickly. However, borrowers should be aware that hard money loans can also come with higher fees and stricter terms, so it's important to weigh the benefits and drawbacks before making a decision.
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What are Hard Money Loans and What Are They Used For?

A hard money loan is a short-term loan that is secured by a real estate asset. Properties receiving the hard money loan are considered collateral on the deal. Hard money loans or mortgages are primarily used to secure financing quickly or when a borrower has credit issues. Hard money loans can be used as financing for most property types including apartments, office buildings, industrial properties, retail centers, and others. Hard money loans are a form of non-conforming loan for commercial or investment property that does not come from a traditional mortgage lender. Hard money loans are called as such due to the “hard” or tangible asset that secures the loan. 

The drawbacks of hard money loans include higher interest rates and associated fees - this is due to the heightened risk that the hard money lender is taking on by offering the loan. Hard money lenders are typically an individual or group, as opposed to a bank in other real estate transactions. 

What is a Hard Money Lender?

A hard money lender is the lender overseeing a hard money loan. Typically, this can be a private investor, a group of investors, or a licensed mortgage broker that is using their own capital. Hard money lenders often are focused on underwriting the asset as opposed to the credit history of the borrower. When reviewing a potential loan, hard money lenders will require a firm understanding of the business plan for the asset. Typically, hard money lenders can get you capital quickly as a financing partner if you are able to meet their terms. 

Rates and Criteria of Hard Money Loans:

Hard money loans require several criteria to be met:

1. The first is often a down payment ranging from 30-40% of commercial property’s value.

2. Exemplify a supply of cash reserves to cover insurance, taxes, loan payments, among other costs. 

3. Borrowers must also be able to show overall financial strength for meeting payments and experience in real estate. 

4. A hard money lender will require details of the strategy for the loan's usage, as well as of the project and the property. The assumptions exemplified by the borrower must be reasonable and must include how the borrower will repay the loan - i.e. a thoughtful exit strategy. 

In terms of rates, the average interest rate charged on a hard money loan can range anywhere from the high single digits to the mid-teens. 

Benefits of Hard Money Loans:

Hard money loans are generally simpler to acquire than traditional bank loans, especially for real estate investment properties. When borrowers are cash strapped, requiring another push of quick funding, hard money loans can be arranged within a narrow time frame to meet that need. With fast approvals available upon the submission of all required documents, hard money loans can be arranged in a week or less. 

Furthermore, these loans have a flexible prepayment period, meaning that borrowers can arrange customized repayment plans depending on the project’s timeline and requirements. 

Hard money loans oftentimes do not have repayment penalties, as opposed to a traditional bank loan. This means that if you repay the loan quicker than expected, you will not be forced to pay a fee. 

Lastly, credit history is not as much of a considered factor when lenders assess the hard money borrower. With a traditional bank, borrowers must prove a good credit history in order to secure funding. For hard money lenders, the key components of arranging financing include the borrower’s equity and the value of the property. If this criterion is met, borrowers are likely to be approved for their loan. 

How Do Borrowers Get a Hard Money Loan?

A hard money lender is oftentimes more focused on the value of the borrower’s hard assets, as opposed to the creditworthiness of the borrower. As a result, borrowers can often secure a hard money loan by proving a high borrower’s equity and equally high value of the investment property. 

As opposed to a traditional bank loan, significantly less paperwork is required for a hard money loan. Paperwork required will likely include a proof of income - how the borrower plans on making monthly payments, a repayment strategy, an analysis of the properties’ value, and all fundamentals of the deal overall. The borrower will also be required to cover a down payment - the difference between the purchase price and the loan balance. 

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