Why Hard Money?
Although hard money loans are considered critical to success by experienced real estate investors, many newer investors are still reluctant to take advantage of the benefits that these non-traditional loans bring. Because of the misconceptions of many people on hard money lending, they would rather use personal savings or traditional loans to finance a real estate deal.
This site was created to help you discover why hard money is the perfect type of financing for your real estate deals and show you what you need to know to find reliable hard money lenders.
What is Hard Money?
Hard money is a type of creative financing usually provided by private investors and small lending companies instead of institutionalized lenders such as banks, mortgage companies and credit unions. It is primarily asset-based and a loan’s eligibility is determined by assessing the value of the collateralized property. Because hard money is asset–based, the credit score of the borrower is not important. If a lender believes that a property, or “deal,” is good, he hard money loan will be provided to the borrower.
This type of lending is not meant to provide long–term financing solutions. Hard money is usually used as bridge loans, or short-term loans, that enable a borrower to obtain temporary but fast solutions to a financial problem or to close real estate deals quickly.
In real estate investing, hard money lenders generally provide around 65% of a property’s after repaired value (ARV). That is, if the property offered as collateral is valued at $100,000 in good condition, the borrower can usually get $65,000 from the lender. Some lenders go as high as 70% of the ARV. Interest rates, on the other hand, usually range from 5%- 15% and lenders may charge two to five points of the loan for financing fees. The repayment period is considerably shorter and it ranges from three months to twenty-four, depending on the agreement between the borrower and the lender. This setup provides security for hard money lenders in case the borrower fails to repay his loan and they have to foreclose the collateralized property.
Although obtaining hard money loan can seem expensive to the average borrower, securing hard money for a real estate deal, can be extremely beneficial to both the borrower and the lender if the deal is structured properly.
Who Uses Hard Money Loans?
Typically, hard money loans are used by real estate investors when a traditional loan does not fit their needs. They are also pursued by those who cannot comply with the lending standard set by banks or government- sponsored financing institutions such as Fannie Mae and Freddie Mac for real estate investment funding.
A hard money loan is a great financial tool for those who, due to a number of reasons, can’t or don’t want to qualify for conventional financing. Investors and entrepreneurs with poor credit scores, bankruptcies, no verifiable income, or too much debt are encouraged to use hard money. Investors who are just starting out and are short of investment capital can also benefit from this type of non-traditional lending.
In particular, hard money is extremely useful for real estate investors.
Many real estate entrepreneurs use this method of financing, especially if they have little time to close a deal. Hard money loans are also ideal for property owners with unfinished or undeveloped properties and are in need of short-term financing. In addition, hard money loans can be used for both commercial and residential real estate transactions.
Aside from obtaining real estate, hard money loans can also be used for building and land acquisition, real estate development, second mortgage, non-bankable transactions, foreclosure bail-out, and emergency financing, among others.