Hard Money Loan: What Is Hard Money Loan And How Does It Work?

Hard money loans are a convenient way to obtain a real estate loan for those who do not want to work with traditional lenders such as banks, credit unions, or mortgage agencies. Conventional lenders typically consider your income and credit score when determining your willingness to lend money and the interest rate they will charge you.

What is a hard money loan?

The term “hard money loan” is defined as a loan obtained against tangible collateral rather than credit assessment. On the other hand, hard money can be an attractive option for those who need to close on a property sale quickly or have a low credit score. As a starting point, we will go over the fundamentals of hard money loans, such as how they work, their uses, and some of the benefits and drawbacks of taking out a loan with hard money.

A hard money loan is a private or non-traditional lender loan that is unsecured by collateral. Hard money loan accomplished by using the asset purchased as collateral for the loan, thereby reducing risk for the borrower and the lender. It is a loan that bridges the gap between an investment purchase and long-term financing. As an alternative definition, a short-term bridge loan is another name for this type of loan.

Hard money loans are used when there is a short time between purchasing and selling a piece of real estate. They can also be used for short-term home financing while the buyer seeks a traditional loan.

Hard money loans are commonly used in the real estate industry. Some real estate investors purchase properties in need of repair, renovate them, and then resell them for a profit. Flipping is a term used to describe this type of investment, which can be difficult to finance.

Other real estate investors who cannot obtain conventional financing for commercial or rental properties may turn to hard money loans for assistance.

What are hard money loans used for?

People mostly get hard money loans to purchase real estate. A traditional mortgage is likely to be the more financially stable option in most cases; there are instances when a hard money loan can prove beneficial.

One common application for hard money loans is in real estate investing, specifically in flipping houses. Someone purchases a dilapidated house, renovates it, and then sell it for a profit, hoping to make a tidy profit. Hard money loans can be advantageous in this situation because the term for which borrowers require to repay the loan is short. It is only as long as they can fix and flip the property before selling it.

A cash bidding war may also be an instance in which a hard money loan would be beneficial. Consider a scenario where you are desperate to purchase a piece of real estate. Still, you do not have the time to go through the lengthy and time-consuming mortgage application process.

A hard money loan can be approved quickly, providing you with the funds you require to make a competitive offer. Therefore, a hard money loan is called a bridge loan. However, there are risks associated with this, which we’ll discuss in greater detail in the following sction.

People use hard money loans to simply buy a house but do not have the credit to qualify for a traditional bank loan. An asset-based loan could provide a viable alternative if you have an abundance of owned tangible assets but a poor borrowing history for whatever reason.

The risk associated with this option may be higher than that associated with a conventional mortgage. In contrast to a traditional mortgage with a 30-year repayment term, hard money loans may only have a 3-year repayment term.

How a hard money loan works?

To better understand how hard money loans work, it’s helpful to compare them to traditional loans or mortgages that you already have. There are only a few people with the liquid cash on hand to simply purchase a home outright with no down payment or mortgage.

Consequently, they take out a loan from a bank or credit union to finance their purchase. It is pretty much possible to purchase a property with the money they have loaned you. After that, they can make payments to them throughout ten to thirty years, all as part of a manageable debt repayment strategy.

Traditional mortgages are subject to several conditions. Banks, for example, want to know that you’re a dependable source of credit. To determine this, they will examine your credit history and personal track record before lending you money (say, for college, or to buy a car). Your credit score serves as a barometer for this.

Depending on how consistently you have paid back loans in the past, your credit score informs banks and other lending institutions about your likelihood of repaying money borrowed in the future. You are more likely to pay back the money you have borrowed with a better credit card score. Also, more importantly, the more likely it is that you will receive a reasonable interest rate from the bank.

What are the pros and cons of hard money loans?

Like any financial product, hard money loans have their advantages and disadvantages. Before deciding whether or not to pursue a hard money loan, it is better to be well-versed in the benefits and drawbacks of such a loan.

The pros of hard money loans include the following points:

1- Hard money loans are more accessible to those with poor credit histories, making them more widely available than a traditional mortgage might otherwise be the case. It would often apply when a borrower had a lower credit score but owned several valuable assets. Which could be used as collateral when taking out the loan.

2- Because loan agencies do not need to perform an extensive credit check, they can typically approve and disburse funds in a shorter period. As a result, if you require cash immediately, you will most likely be able to obtain it more quickly than you would with other types of loans.

3- Some hard money loans have flexible repayment schedules, which can be advantageous. Tangible assets partly secure them. The lending agency may be more flexible with your repayment schedule because you are employed at a smaller company rather than a larger corporation.

Cons include the following points:

1- As previously stated, hard money loans are notorious for having highly high-interest rates. Suppose you are unsure that you will be able to comfortably pay back your loan within a short period. In that case, you will have to pay a significant amount in interest — significantly more than that of a traditional house loan. Not sure how having a high-interest rate for an extended period will affect your finances? Take a look at our explanation of debt and personal worth.

2- By their very nature, hard money loans necessitate risking one’s assets. Suppose you pledge your priceless family heirlooms or childhood home as collateral for a hard money loan and cannot repay the loan. In that case, you run the risk of losing your valuable possessions to the lending institution.

3- Because of market fluctuations, taking a hard money loan to flip a house can be risky. As with any business venture, house-flipping requires you to take the risk. Suppose something happens and the housing market takes after taking out a loan to flip a house. In that case, you could find yourself with insufficient funds to pay off the loan from the proceeds of the sale of the property.

Risk is unavoidable, but it’s always a good idea to make sure you’re not putting yourself in too much danger when it comes to real estate.

When do you need a hard money loan?

If you cannot obtain traditional financing for your real estate purchase, hard money may be an option for you. As conventional lenders are concerned about the value of your collateral, hard money loans complete more quickly than other types of loans.

Although hard money lenders ensure that you can repay the loan, they do not spend as much time reviewing your application as traditional lenders. As an example, they may not spend as much time verifying your sources of income or checking your bank statement as you might expect.

Once you have a working relationship with a lender, you can quickly complete additional funding processes. It allows you to close deals that others may not be able to. It is beneficial in hot markets where properties are subject to multiple offers.

What are the special considerations for hard money loans?

A hard money loan costs higher for the borrower than the financing available in banks or government lending programs, reflecting the higher risk the lender is taking by providing the funding. On the other hand, the increased expense is a tradeoff for faster access to capital, a less stringent approval process, and the possibility of greater flexibility in the repayment schedule.

Hard money loans are for various purposes, including turnaround situations, short-term financing, and borrowers with poor credit who have significant equity in their property. A hard money loan can prevent a property from foreclosure since you can obtain them quickly.

What does a hard money loan mean for individual investors?

Although approval is quick and straightforward, most hard money lenders keep loan-to-value ratios (i.e., the ratio between the loan amount and the home’s value) at or near the bare minimum. Because the maximum loan-to-value ratio (LTV) typically ranges between 65 percent and 75 percent, you’ll need assets to qualify for hard money.

With conservative ratios, lenders are confident that they will sell your property quickly and recoup their investment.

Hard money loans make the most sense when it comes to short-term loans. Investors who fix-and-flip properties are excellent examples of hard money users. Since they only own property for the duration necessary to improve it, increase its value, and then sell it as soon as possible after that improvement.

Hard money borrowers may expect to sell a property and recoup their loan payments within a year of taking out the loan. In some cases, using hard money to purchase a property that you intend to live in may be an option. Yes, you could do so, but you would want to refinance as soon as possible to take advantage of lower interest rates and a longer loan term.

What is the average interest rate for a hard money loan?

The interest rates are typically very high. The interest rates on hard money loans can be even higher than those on subprime loans in some cases. According to the Federal Reserve, the average interest rate on a hard money loan is 11.25 percent in 2020, ranging from 7.5 percent to 15 percent for loans in the United States.

How one can get a hard money loan?

To obtain a hard money loan, you’ll need to contact financial institutions specializing in this transaction type. In most cases, quick internet searches for hard money lenders will turn up a slew of lenders in your neighborhood.

Names are obtained from local real estate agents and real estate investor groups, among other places. Reach out to several lenders, discuss your requirements, and establish a working relationship so that you can fund projects quickly and efficiently when the need arises.

Because hard money loans are less regulated than traditional loans, it is beneficial to shop around. You may negotiate lower interest rates or different terms with different lenders, depending on your situation.

What is hard money financing and how does it work?

In the short term, the hard money financing helps purchase and renovate the property they are interested in. The loan is refinanced with a traditional commercial mortgage to fully repay the hard money lender when they are ready. Hard money loans significantly reduce time. It takes less time to receive your funds because they do not follow traditional processing procedures.

What are the best hard money loans?

Some of the best hard money and fix-and-flip lenders can be found in this list.

Do hard money

‘Do Hard Money’ is one of the first stops for people who are looking for hard money loan. If you’re looking for 100 percent hard money financing for your business go for ‘Do Hard Money’. First and foremost, they are capable of providing 100 percent financing for your fix and flip project, which is a rarity in the hard money world. When it comes to the underwriting process, they don’t require any credit or previous experience, and they don’t have a minimum downpayment requirement.

Although, as with any hard money lender, ‘Do Hard Money’ does not guarantee a profit on any flip, they report a healthy average profit of $33,578. That is a good starting point for new flippers and a valuable cog in the machine for experienced flippers looking to add substantial cash to their existing business.

Contrary to the typical hard money loan interest rate of 10-15 percent, ‘Do Hard Money’ charges interest at a rate of 1.25-1.5 percent per month for the loan term duration and does not impose prepayment penalties. It can result in significant interest savings and reinvest more money back into the business for qualified and able borrowers.

‘Do Hard Money’ also has a funding time of 12 days, which is slightly faster than the industry average. It allows you to get the money you need for your project at least a few days sooner than you would with other lenders.

While ‘Do Hard Money’ does not require a down payment of any kind, they will charge their fees upfront. It is one of the most frustrating aspects of the lending process for those who have had bad experiences with the lender.

LendingOne

Even though ‘LendingOne’ does not claim to provide 100 percent fix and flip financing, they can cover about 90 percent of the purchasing cost and rehab, up to a maximum of $4 million. With an emphasis on user-friendliness, they make the application process more straightforward.

‘LendingOne’ advertises ‘Repair and flip loans,’ “interest-only” loans that you can pay back over 12 months. Their interest rates are the most competitive in the fix-and-flip industry, with some as low as 7.49 percent.

To avail ‘LendingOne’ loan you need to have a personal credit score of 620 at least. You also need enough cash reserves to cover at least six months’ worth of expenses for eligibility to get the best rates and the most extended terms.

Their funding time for smaller fix-and-flip projects is 10-days, but this time may be longer for long-term loans or ground-up construction projects. ‘LendingOne’ is a fantastic option because of the ease with which the application process completes, as well as the generally favorable terms.

Amza Capital

Amza Capital is one of the industry’s leaders in hard money lending. They possess the necessary qualifications to maintain their position. Personal credit scores of 650 or higher are required for consideration. Higher scores are required to qualify for their more favorable terms and conditions.

It is preferable to work with an experienced flipper. If this is your first time, make sure to work with a mentor or a licensed contractor to build your resume before submitting your application to the company.

A fix and flip credit line from Amza with a significantly higher credit limit (up to $25 million), fixed rates, and terms of up to 24 months are available to real estate flippers with multiple projects in the works.

Amza should be at the top of your list when looking for a lender. With terms averaging 12 months, rates averaging 7-12 percent, and closing costs averaging $995, Amza should be on your list.

Are hard money loans more expensive than subprime loans?

On the other hand, traditional commercial loans typically have interest rates ranging from 1.176 percent to 12 percent. In this regard, hard money loan interest rates can be higher than subprime commercial mortgages. The cost has gone up significantly because of the increased risk lenders take on when providing this type of financing.

How to get 100% financing with a hard money loan?

All hard money lenders do not offer the same types of loans to all their customers. Even though you get approved for a hard money loan, you probably won’t get approval for 100% financing. Luckily, you can opt few approaches to ensure you receive 100 percent funding for your project.

Make sure that your deal has an ARV of less than 70 percent. Your ARV (after repair value) should be less than 70% of the original purchase price. It includes the property’s purchase price, renovation, and loan costs.

Maintain a good credit rating. While having a good credit score is advantageous when applying for a traditional loan, it is also beneficial when applying for a hard money loan. While it is possible to obtain a hard money loan with fair or poor credit, you may not be able to get 100 percent financing.

Have a little bit of experience. Many hard money lenders will not lend money to borrowers attempting to flip a house for the first time. Having prior house-flipping expertise can work to your advantage.

Be adaptable to coverage as some hard money lenders will cover the purchase price, but not the closing costs or other costs associated with the transaction (like repair costs, for example). You may be required to cover some of the expenses out of pocket (maybe business or marketing costs). One hundred percent financing may or may not be available depending on the lender.

Take into consideration the upper limit, and don’t be surprised if a hard money lender has a maximum loan amount that you can obtain for your business. Suppose your property is worth more than the maximum loan amount. In that case, you can get the maximum loan amount. Still, it may not be enough to cover all your necessary expenses.

Is it a good idea to go for hard money loans?

Most financially conservative borrowers regard hard money loans as a “last resort.” A trade-off is that the interest rate is higher than traditional commercial loans, ranging from 10% to 18% higher than conventional commercial loans. Borrowers often pay only interest during the short term. A balloon payment will be required to complete the repayment process.

Before you apply, double-check that doing so is the right decision for you.

Is it to flip a house? Suppose you need short-term financing for a project like converting a home or updating a rental property. In that case, hard money loans are a good option. You should consider a conventional FHA or another type of traditional mortgage if you’re looking to purchase a house to live in full-time.

Have you ever made a profit by flipping houses? The first time you flip a house, it is possible that you will not be able to qualify for a hard money loan. This type of financing is better suited for someone who has prior experience in the field than someone just starting.

Do you have any spare cash that you could use for additional financing? No matter if it’s for a down payment or to cover the costs of what a hard money loan will not cover, you will need funding from a nontraditional source for other purposes. Otherwise, you take out an additional loan to cover the shortfall.

Suppose your property doesn’t sell right away. In that case, you may find yourself liable for a more significant sum of money than you had initially anticipated. You must have enough money for a down payment or whatever else a hard money loan won’t cover. It includes the difference between getting approved and being denied a hard money loan in some situations.

A hard money loan is not without its flaws. While it appears straightforward—an asset serves as collateral for the loan, ensuring the safety of all parties involved—hard money has its drawbacks.

One of the most worth mentioning disadvantages of using hard money may be the additional expenses. Taking out a loan in this manner is extremely expensive. In addition, interest rates are high, and you may be required to pay closing costs or other fees to obtain funding.

A short time frame can also be a source of danger. For instance, sometimes things do not go as planned during renovation, such as material delays or structural surprises. You might get into a cash crunch or pay more interest than you planned.

Finally, how lenders assess the value of your property may cause you to expend more resources than you anticipated. Suppose your lender required a 30 percent down payment when you had expected a 20 percent down payment. You might find yourself with a shortage of capital for labor and materials.

Conclusion

In short, hard money lending refers to a type of financing provided by non-banking financial institutions or individuals to real estate investors. Because collateral security backs it, it does not require extensive credit investigation. Choosing a hard money lender is preferable for the investor because the loan quickly disburses. You get it typically within a week, unlike traditional banks, which usually take between one to two months to pay the funds.