What comes to mind first when you hear the term “Hard Money?” Do you think of loan sharks, costly rates & fees, or troubled borrowers? Or do you see an opportunity to fix and flip a house quickly or purchase an investment property before someone else? There are a lot of different interpretations out there, so let’s uncover the truth behind hard money loans.
First, what is hard money? A hard money loan is a short-term loan secured by a borrower’s real estate and made by a private lender. Unlike a traditional bank loan, private lenders look at the value of the real estate to determine whether to make the loan over a borrower’s credit worthiness. Private lenders who make this type of loan can be individuals, groups of investors and even licensed brokers.
While a hard money loan may be sought from some individuals with credit issues who are not able to secure a loan with a traditional lender, they are often times used by house flippers who want to acquire, fix and flip a property in just a few months; real estate developers who want to buy a lot, build a home and then turn around quick to sell it; and savvy investors who want to acquire a property and need to do it quickly but may not have the proper cash immediately at hand to do so, or simply want to make a short-term investment.
Hard money loans are often times misconceived as outrageously expensive, only for desperate borrowers and only being given by loan sharks with impossible terms to ensure they can just take over your property when you fail to meet the terms. So what are the hidden truths behind hard money loans? Here are some of the key points and benefits to know:
Primary Qualification – Private lenders use asset-based underwriting, meaning the primary consideration they are looking at when making a loan to you, the borrower, is the collateral. While they are not focusing on a borrower’s credit as the determining factor, they will want to make sure you have cash reserves on hand to be able to make your monthly loan payment should something unexpected happen with regard to your loan.
Quick & Convenient – Hard money loans can be closed relatively quickly, in just a few days or weeks, as opposed to a traditional bank which can take months to get to closing.
Cost – Hard money loans are not as expensive as one may think. While it is true the rates are higher with a shorter repayment period (typically six months to two years), the benefits often out weigh the costs. The loans are typically interest only with no pre-payment penalty, allowing borrowers to save money in the long run and free up their cash flow. This is often the most cost-effective option for those looking to acquire and sell a property quickly.
Flexible – Private lenders have the ability to negotiate terms to better meet your needs and evaluate each deal individually. Flexible structures can be used for a variety of purposes, whether that be adjusting repayment terms, fees or making a complex deal come together without jumping through the hoops of a traditional lender or dealing with the hassle of finding a lender who is willing to consider your high-risk deal.
Lender Credibility – Private lenders do not give out loans unless they deem it a smart and profitable investment. They are savvy business people who are looking to make a profit, therefor want to make it easier for you, the borrower, to pay them back. That being said, do your homework. While most private lenders are legitimate, predatory lenders looking to take advantage of a borrower do still exist.
Hard money loans often get a bad wrap. While they may not necessarily be the right fit for your specific lending circumstance, they are a respectable venture in the commercial lending industry.