Hard Money Loans: A Good Alternative

When financing through a bank is not an option, hard money loans are a good alternative. Considering a hard money loan is a multi-tiered process. And like with all kinds of loans, there are requirements and risks to know about before considering getting started with one. Since hard money loans are a little different from traditional bank or credit union loans, it’s important to know the key discrepancies in order to make the wisest decision for your loan.

What exactly is a hard money loan?

Hard money loans are privately-funded loans secured by real estate. Contrary to loans provided by conventional lenders, hard money loan amounts are based on the value of the subject property. The term usually lasts about 12 months, but can be extended for a couple of years, with required monthly interest payments. Since hard money loans are primarily concerned with the property’s value, borrowers can still have a chance of being approved despite a foreclosure or short sale if they have sufficient equity in their collateral property.

Who should consider hard money loans?

Real estate developers and house flippers usually use hard money loans when they plan on renovating a property and reselling it for profit. An investor who’s been rejected a loan by a bank, whether because of insufficient income history, foreclosures, credit issues or other concerns will opt for a hard money loan, which brings us to the next question.

What are the requirements for hard money loans?

Almost any type of property can suffice to receive a hard money loan, including multi or single-family residential's, land, industrial and commercial.  Credit score isn’t much of a concern for the lenders,  so long as the buyer has the capital to pay off the interest.

Lenders focus on the “after repair value,” or ARV, when considering whether to make the loan. This is an estimate of what the property’s value will be after it’s been renovated or repaired.

What are the risks in hard money loans?

With every loan there comes a risk. Since hard money lenders actually take on more risk than conventional lenders, there is also more risk on the buyer’s side. Interest rate is one of these, with the average rates rating from 12 - 18% depending on the lender and region, roughly 10% higher than conventional loans. Since hard money loans are so convenient, their origination and loan-servicing fees, along with closing costs are likely to be higher as well. Hard money loans also feature much shorter repayment periods, which is why it’s important to make an accurate estimate for how long it’ll take the property to become profitable.

What are the benefits in using hard money loans?

Hard money loans are sometimes referred to as “last-resort” loans. This is because they almost completely eliminate the massive time consumption that comes with applying for a regular mortgage. Contrary to conventional loans, which can take months to close on and puts investors at risk, hard money loans can be funded within a week and the application process generally takes a day or two. This is especially convenient for investors who are trying to acquire a property with several competing bids. Hard money loans are also more flexible than conventional ones. Since they’re provided by private lenders, borrowers can often tailor the terms to their needs, such as the repayment schedule and other fees.

The last word

If you’re a real estate investor who’s trying to get a seller’s attention and set their offer apart on a property with many competing bids, hard money is the way to go. By making sure you have the equity to pay the interest rates, making an accurate estimate of your property’s ARV and working with a reputable hard money lender, you’ll be fully equipped to fund your real estate deals with a hard money loan.