What’s the first thought that pops into your head when you hear the term “hard money lender?” Perhaps it is something related to suspicious lenders conducting their business in dark alleys and charging sky-high interest rates?
Some years ago, this perception was pretty accurate. Indeed, some black sheep have tarnished the reputation of the hard money lending industry in their attempts of loan-to-own and providing risky loans to borrowers. However, fortunately, these bad apples do not exist in today’s market, and hard money lenders offer tenfold benefits to their borrowers.
This article will explore everything a beginner needs to know about hard money lenders and how these loans work. Let’s begin!
What is a Hard Money Lender?
A hard money loan is a short-term loan secured for real estate. The loans are funded by either an individual hard money lender or a combined fund of lenders. Albeit short-term, these loans can be extended to longer terms of up to 5 years. The borrowers need to pay monthly interest payments plus principal or only interest, and the balloon payment is paid when the term ends.
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The amount of money lent to borrowers is primarily based on the subject property’s value. This property can be owned by the borrowers who wish to use it as collateral, or it could be the property the borrower aims to acquire.
Although credit has some value to the lenders, they are primarily concerned with the property’s value rather than the borrower’s credit. Borrowers can obtain hard money loans if they have enough equity in the property being used as collateral, even if they cannot get conventional financing due to recent foreclosures or short sales.
Simply put, hard money lenders offer a golden opportunity to buyers when they haven’t had any luck with banks.
Interest Rates and Points for Hard Money Loans
The interest rates and points charged by hard money lenders are not the same as banks. They vary from lender to lender and also vary based on region. For instance, California has lower interest rates compared to other parts of the US since there are plenty of hard money lending firms in the state, and each firm wishes to stay at the top.
As you can tell, hard money lenders risk their loans more than conventional bank loans. Given the high risk, the interest rates are higher than traditional loans. The rate of interest lies in the range of 10-15%, depending on the risk, the lender, and the region. As for the points, they can range anywhere from 2-4% of the total amount of loans. The loan-to-value ratio is also factored in to determine the interest rates and points.
When Should You Borrow Hard Money Loans?
You might be disappointed to learn that hard money loans are not suitable for all deals. For instance, lending from a bank is the best bet when:
- Purchasing a primary residence with an income history and adequate credit.
- You do not face any issues such as foreclosure or short sale.
However, borrowers can turn to hard money lenders if they want to act fast do not have sufficient time for the lengthy approval process required by banks.
Hard money loans are ideal for situations such as:
- Land Loans.
- Fix and Flips.
- When a real estate investor needs to act quickly.
- Construction Loans.
- When the buyer has credit issues.
Reasons to Use a Hard Money Loan
There are several reasons why investors choose to use hard money lender. The primary reason is the ability to acquire the funds quickly. In most cases, hard money loans can be funded in less than a week. Now, compare it to the tedious process of bank loans requiring a gazillion approvals and taking up to 45 days—who wants to wait that long?
The application process for hard money loans typically takes up to two days. If you are lucky, your loan might even get approved the same day! Real estate agents have a significant advantage with hard money loans when trying to acquire a property. When there are multiple competing bids and banks take too long to respond, hard money loans can be a lifesaver. They offer a quick close to get the seller’s attention and set the offer apart from the competing buyers offering conventional financing.
Another reason hard money loans are prevalent is the rejection by banks for conventional loans multiple times. If you have been in this situation, you can better understand all the problems that can arise, such as credit issues, short sales, or foreclosure.
Plus, banks also need to see your income history. If you have recently started a new job, chances are your loan request will be denied due to inadequate income history, even if you have a handsome income. On the contrary, hard money lenders are not concerned with these issues. As long as you have the means to repay loan and have enough equity invested in property. Nothing can come in your way of acquiring a hard money loan.
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Final Thoughts
Hopefully, reading this article offered you all the insights you needed about hard money loans to take a leap and consider it for your real estate deals. Albeit the higher interest rates seem intimidating, the benefits you get are tenfold and outweigh the one drawback. However, you must remember that working with hard money lenders is a two-way road. They work with you as much as you want to work with them. Additionally, you should be cautious and have multiple exit strategies. That way, you won’t be stuck with a debt you can’t pay back in case of unforeseen circumstances deviating you from your original plan.
