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A Comprehensive Guide to Hard Money Lending – PART 1

If you have a little bit of experience in real estate investing, you’ve probably heard the term ‘hard money’.

Hard money lending is the process of securing a hard money loan through private investors or companies, as opposed to a bank or traditional financial institution.

What Is A Hard Money Loan?

Simply put, hard money is a short-term loan. These loans are provided by individual investors or groups of investors to real estate investors.

Primarily used for property acquisition, development or expansion, hard money loans have six-month duration.

However, the loan can  be extended to 2–5 years, depending on an investor’s specific financial needs and an investor’s lending capacity.

Hard money lending is commonly used by investors who want to buy, renovate or improve a real estate property and then sell it.

If you’re considering applying for a hard money loan, you will need to determine how much loan you need.

How Much Loan Amount Can Be Borrowed?

Generally speaking, hard money loans come in varying sizes. What’s more important is that collateral is the most important aspect of hard money lending. Hard money loans are based on collateral. Therefore, the amount of loan you can borrow will depend on the value of your real estate property (collateral). As long as the collateral value is sufficient enough, you can get the loan.

What Rates Can You Expect on A Hard Money Loan?

While hard money loans vary among lenders, they are higher than bank rates. This is primarily because of the higher risk and shorter time duration of the loan.

In most cases, hard money rates may range from 10 to 15 percent. However, rates differ from one lender to another lender. Hard money loan repayment includes monthly installments and a balloon payment, which is due at the loan term.

Types Of Properties Financed With A Hard Money Loan

A hard money loan can be used to purchase, renovate or improve all types of properties, including but not limited to:

  • Commercial properties– office buildings, retail and shopping centers, hotels, industrial facilities and more.
  • Non-owner occupied residential properties
  • Land

Hard money lending companies typically provide funding for different types of properties.

Types of Hard Money Loans

While there are a variety of hard money loans available today, the following are the most common loans:

  • Purchase Loan: This loan is used to finance the acquisition of a property.
  • Refinance Loan: Borrowers can use refinance loans to repay their existing debt.
  • Cash-out Loan: A cash-out loan allows a borrower to pay-off their existing debt with the additional funds. If a borrower is debt-free then they can use a cash-out loan to finance working capital for their property.
  • Rehab / Renovation Loan: This type of loan is used to buy an undesirable property and improve it. The borrower uses the money to make the necessary renovations to the property.
  • Bridge Loan: A bridge loan is a temporary or short-term loan. This type of loan is suitable for a real estate investor who wants quick access to funding for improving their cash flow. Bridge loans are backed by collateral.

Before choosing a hard money loan, you need to understand its terms and conditions.

Hard Money Lending Vs. Traditional Lending

Here are the main differences between a hard money loan and a bank loan:

  • Hard money lenders are mainly concerned with an applicant’s collateral value than their credit history. Having a low credit score will not minimize your likelihood of securing hard money funds. However, credit score is a vital determining factor for banks. Banks use the credit score to assess an individual’s financial capacity to repay the loan in a timely manner. Maintaining a good credit score results in faster bank loan approval as well as attractive loan rates and terms.
  • Many hard money lenders do not offer funds for owner-occupied residential buildings as they carry several rules and regulations. This can ultimately increase a lender’s risk level. Hard money loans are designed for commercial and investment properties.  Banks, on the other hand, provide loans for financing residential units.
  • Hard money lenders have their own lending criteria. Therefore, these loans are more flexible in terms of loan amount and conditions as compared to rigid bank loan agreements. A hard money lender and borrower can negotiate the loan amount and repayment terms. Banks, however, follow a standardized underwriting structure. Along with the rigid loan terms and conditions, banks take a lot of time verifying every applicant’s loan application and financial information. Hard money loans offer borrower quicker access to funds due to flexible loan approval guidelines.
  • Hard money loans have interest rates higher than bank rates. This is why they are considered an “alternative” for borrowers who cannot get a loan from a bank or other traditional lenders.

Wondering how to apply for a hard money loan? Watch this space to understand how hard money lending works and its requirements.