A hard money loan is based on “hard” assets, like real estate. These loans are short-term loans, usually extending for around 6-12 months, and are often the ideal solution for real estate investment projects.
Because the loan is secured by real property, the state of your credit, while important, is less critical. The property’s location, total value, and available cash assets or pledged real estate collateral can offset less-than-perfect credit.
Hard Money loans differ from conventional loans in several ways. Most hard money lenders calculate the amount you can borrow based on either the “as-is value” of your property or the “After Repair Value” (ARV). Repayment is not structured on amortization but simple interest-only payments. Then at the end of the term, you pay the principal in a lump sum. Hard money loans are ideal for “fix and flip” or “fix and hold” deals.
There are many situations where hard money loans can be ideal for investors, including:
Real estate investors typically take out hard money loans when purchasing a property that requires much work. The total amount of the loan is for how much the property will be worth once renovations are complete. Again, this is known as the “After Repair Value.” No matter your reasons for using a hard money loan, the lender you choose will also want to know your exit strategy (in other words, your plan for how you’ll repay the money you borrow).
Since this type of loan would be short-term, the buyer has plenty of options following repairs. First, your plan might be to quickly rehab and sell the property to repay the loan—this is typically the favorite strategy among “flippers.” Otherwise, your plan to repay your hard money loan may be to transition into a traditional loan after completing the renovations. This second strategy is a favorite among landlords.
For more information on Hard Money, see our Investment Property FAQs.
Hard money loans can come in many different shapes and sizes, so the differences between hard money loans and traditional loans can be significant. For one, the repayment structure is other than conventional mortgages.
With a traditional loan, the repayments are calculated using amortization. Each repayment contains a portion that covers the interest due and a portion that pays the loan principal a little more each time. Payments on hard money loans are interest-only payments. Then, at the end of the loan term, the borrower pays the principal owed in a lump sum.
With traditional home loans, the money is issued by banks, financial institutions, or lenders. Hard money lenders or private money lending usually issue hard money loans. Mortgage lenders and banks must adhere to strict regulations. These can inhibit lending for real estate investment deals (even great ones). On the other hand, hard money lenders aren’t constrained by those same regulations and can make decisions based on sound business sense.
The approval process for hard money loans is generally faster—significantly faster—than the conventional loan process. This makes sense for investors who need to act quickly in a short period. In most situations, a hard money loan can be funded in as little as 7-10 days, sometimes less.
With hard money loans, other factors such as the property’s location, total value, and available cash assets might offset less-than-perfect credit. Additional real estate could also be pledged as collateral, and the borrower’s contribution to the transaction is also an important element. These factors should all be taken into consideration.
Armed with all the facts of your circumstance and situation, we work with you to structure the best financing fit for you.
Our Loan Specialists have analyzed countless investment deals. We’re happy to help you find just the right solution.
The Super-Simple Application™ takes fewer than 3 minutes to complete. A knowledgeable Loan Specialist will contact you right away, help you with any questions, and assist you in making the best choice. There’s no obligation on your part. The only obligation is our obligation to ensure you are 100% satisfied with our service.
6-60 Months based on qualifications & project
Up to 80% ARV (After Repair Value)
Purchase | Refinance | Renovation | Bridge
We fund real estate projects quickly so you can focus on what you do best…the project.
We are the first to have a stake in every approved project. We are fully aligned with your interests and invested in your success
Since hard money loans offer quick short-term funding, your credit score often isn’t considered. The lender approves your hard money loan based on the value of the property you’ll be using as collateral. Because your credit score doesn’t affect your hard money loan, you may receive your funding in days – not weeks – unlike traditional loans through conventional lenders.
Most lenders give you the option to refinance your hard money loan, and the process is similar to refinancing any other kind of loan that you have. However, depending on the terms of your loan, the hard money refinance process may differ in some ways. Before signing any contract, you should discuss hard money refinancing options with your loan provider.
Now we’re getting down to the juicy facts! Avoid the most common mistakes calculating the actual cost associated with hard money loans. This requires some expertise. Many people focus solely on the interest rate charged on the loan. It’s important to consider other costs into your calculations before agreeing on a lender.
Here are some of the costs that may be associated with your loan:
Interest Rate: Interest rates on hard money are higher than traditional loans, but the loan term is much shorter. It’s wise to consider the actual dollars that will be paid during the term of the loan, rather than the APR.
While there are hard money loans available for less, the average APR tends run between 10-15 percent, depending on three things: the lender, the property and the borrower’s qualifications.
Points: Points are calculated as a percentage of the loan amount. This is the charge for originating the loan.
With most lenders, points can vary between 2-4 percent of the total loan amount. The actual points charged on your loan may depend heavily on the loan-to-value (LTV) ratio of your deal, the interest rate charged and the risk associated with the loan.
Processing and Underwriting Fees: Lenders typically charge a fee to process the loan application and documentation in order to underwrite the loan.
Appraisal Fee: Typically the borrower pays a fee for an appraisal by a licensed appraiser.
Referral Fees: If you were referred to your hard money lender by a REALTOR® or broker, a referral fee might be added to the cost of your loan.
Pre-Payment Penalties: Check the fine print for fees charged for paying off loans early. Some, but not all, hard money lenders charge a pre-payment penalty.