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There are a lot of misconceptions about hard money lenders: what they are, what they aren’t, how much they cost, and when you should use them. Hard money lenders are neither thieving opportunists nor last-minute saviors, but they are a resource that can sometimes be the right fit for a real estate deal.
What is a hard money loan?
Hard money, or private money, is exactly that: non-institutional money that can be borrowed, usually from an individual or an extremely small lending company. They are an alternative to a bank or traditional mortgage lender, and their loans are typically much different.
- Hard money lenders are expensive. They typically charge interest rates in the teens, and charge at least 2-3 points and sometimes as many as 7-8. Clearly, this is not a loan for Joe Homeowner.
- They typically lend for very short terms. This could be anywhere from a few months to a few years, but seldom longer.
- They lend at extremely low loan-to-value ratios (LTVs), meaning that they will only lend a small fraction of the value of a property. If the real estate appraises for $100,000, they might only lend $60,000.
Advantages of hard money loans
With all of that being the case, why would anyone use them? There are several advantages, offsetting all of those disadvantages. To begin with, they are much faster to act than the average bank, often able to close a loan in less than a week. This makes them a good choice for distress sales and other scenarios where an investor has an opportunity to buy low but only within a short window of time. Second, they are collateral-based lenders, focusing first and foremost on the equity position of their lien, and scrutinizing the borrowers themselves far less heavily. That means that they will lend to borrowers with bad credit, borrowers who can’t document income and other difficult borrowers because they are only lending such a small fraction of the value of the real estate.
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Author: Brian Davis
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