What are Hard Money Loans? Find Loans For Real Estate Investors

What is a Hard Money Loan?

A Hard Money Loan is a short-term, high-interest, secured loan (by real property) that is typically used by real estate investors who need to finance a property purchase or renovation. They are often more expensive than traditional mortgages, but they can be obtained more quickly and with less paperwork.

Unlike traditional bank loans, which are heavily reliant on credit history and income, Hard Money Loans focus on the value of the property being used as collateral.

Key Takeaways

• Hard money loans, also known as bridge loans, are short-term, high-interest loans usually lasting a few months to a few years.
• Comes from Private Lenders: Hard Money Loans come from private lenders, not big banks.
• It’s All About the Property: Lenders look at the property’s worth, not your credit score.
• Quick Money: These loans get approved fast, which is great for speedy investments.
• Higher Interest: But beware, the interest rates are higher than regular loans, often between 7% to 15%.
• Flexible Deals: Lenders can customize the loan terms, giving you some wiggle room.
• Short and Sweet: Meant for quick deals, like buying and fixing up a house to sell.

How Does a Hard Money Loan Work?

A Hard Money Loan works in much the same way as a traditional mortgage, the only difference is that it is secured by the property you’re financing which acts as collateral, which your lender can seize & take control over if you default on the loan.

• The borrower (real estate investor) applies for a loan and provides the lender with information about their financial situation and the property that they are financing.
• The lender then assesses the risk of the loan and determines the interest rate and repayment terms.
• Once the loan is approved, the borrower receives the funds and uses them to purchase or renovate the property.

Key Features of Hard Money Loans

Hard Money Loans are generally offered by private lenders or investor groups. They are short-term loans, usually ranging from 6 months to a few years. The key features include:

• Short-term: Hard Money Loans are meant for short-term use; they typically have repayment terms of 6 to 12 months, making them ideal for house flipping or property rehabilitation projects.
• High-interest Rates: Hard money loans typically have interest rates that are 2% to 5% higher than traditional mortgages. The rates can range from 7% to 15% or even higher.
• Secured by Real Property: Hard money loans are secured by the property that is being financed. Lenders evaluate the property’s market value and condition. If the borrower defaults on the loan, the lender can foreclose on the property and sell it to recover their losses.
• Quick Approval: These loans have a faster approval process compared to traditional loans, making them suitable for time-sensitive investment opportunities.
• Flexible Terms: Lenders can offer customized terms and repayment schedules, giving borrowers more flexibility.
• No credit Check Required: Hard money lenders often do not require a credit check for borrowers. This makes hard money loans a more accessible option for borrowers with poor credit.
• Can be used to finance any Real Estate: Hard money loans can be used to finance any type of real estate, including residential, commercial, and investment properties.

Who Needs a Hard Money Loan?

Hard money loans are often used by real estate investors who:

• Have poor credit
• Need to finance a property quickly
• Need to finance a property that is not considered to be a good investment by traditional lenders
• Need to finance a property that is in need of renovation
• Are looking for a non-bank loan option

It can also be used by homeowners who need to refinance their mortgage or who need to borrow money to make repairs to their homes.

Property Developers and Fix and Flip investors are the two most common types of people who look for hard money loans.

Pros and Cons of Hard Money Loans

Pros

• Quick and Easy Approval Process: Hard money lenders often have a quicker and easier approval process than traditional lenders. This is because hard money lenders do not require a credit check and they are more willing to lend to borrowers with poor credit.
• No Credit Check Required: As mentioned above, hard money lenders often do not require a credit check for borrowers. This makes hard money loans a more accessible option for borrowers with poor credit.
• Finance any Real Estate: Hard money loans can be used to finance any type of real estate, including residential, commercial, and investment properties. This gives borrowers more flexibility in terms of the type of property that they can finance.

Cons

• High-interest rates: Hard money loans typically have interest rates that are 2% to 5% higher than traditional mortgages. This means that borrowers will pay more interest over the life of the loan.
• Short Repayment Terms: Hard money loans typically have repayment terms of 12 to 24 months. This means that borrowers will need to repay the loan quickly, which can be a challenge for some borrowers.
• High Closing Costs: Hard money loans often have high closing costs. This is because hard money lenders charge a higher origination fee than traditional lenders.
• Risk of Foreclosure: If the borrower defaults on the loan, the lender can foreclose on the property and sell it to recover their losses. This could result in the borrower losing their property.

Who Benefits from Hard Money Loans?

Hard Money Loans cater to a specific set of individuals and situations. Here are some scenarios where these loans can be advantageous:

a)      Real Estate Investors

Real estate investors frequently use Hard Money Loan to finance property acquisitions. These loans allow investors to act quickly in competitive markets, securing properties that might not be available through traditional financing.

b)      House Flippers

House flippers often rely on Hard Money Loans to purchase homes in need of repair or renovation. The quick approval process and flexibility in terms make it possible to fund these projects efficiently.

c)      Borrowers with Poor Credit

For individuals with less-than-ideal credit scores, Hard Money Loans can be a lifeline. Since the loans are asset-based, credit history matters less to lenders.

d)      Business Owners

Entrepreneurs and small business owners can use Hard Money Loans to secure commercial properties for their operations. This can be particularly helpful when traditional loans are unavailable.

» RELATED: Fast and Easy Loans for Real Estate Investors | New Silver Loans Review

When to Consider a Hard Money Loan?

Hard money loans should be considered carefully before being taken out.

Borrowers should consider using hard money loans for real estate investments like house flipping or commercial real estate purchases when they are in need of fast cash without any hassle and credit checks.

Also, the borrowers should consider when they are comfortable with the high-interest rates and short repayment terms.

Although it can be a valuable tool for real estate investors, it should only be used when other options are not available.

Are Hard Money Loans Dangerous?

Hard money loans can be dangerous and risky if borrowers are not careful. They generally have high-interest rates, short-term, collateral risk, and limited regulations.

While it offers several advantages, they are not without risks. It’s essential to consider these potential downsides:

• High-Interest Rates: The interest rates on Hard Money Loans are higher than traditional loans, which can lead to substantial costs if not managed properly.
• Short-Term Nature: The short repayment periods can put pressure on borrowers to sell or refinance quickly, potentially leading to financial strain.
• Collateral Risk: Since these loans are secured by the property, borrowers risk losing their assets if they default (fail to repay as agreed).
• Limited Regulation: Hard Money Loans are less regulated than traditional loans, making it crucial to work with reputable lenders.

However, hard money loans can also be a valuable tool for real estate investors who need to finance a property quickly or who have poor credit.

Hard Money Lenders Can Help, But You Do Have To Be Wary!

How are Hard Money Loans Calculated?

Hard money loans are typically calculated based on the appraised value of the property being financed.

The lender will then lend a percentage of the appraised value, typically up to 75%. The interest rate on a hard money loan will vary depending on the lender and the risk of the loan.

Example:

Let’s say you are a real estate investor who is looking to buy a property for $100,000.

You have poor credit, so you are unable to get a traditional mortgage. You can get a hard money loan for 75% of the property’s value, or $75,000.

The interest rate on the loan is 12%, and the repayment term is 12 months. This means that you will need to make monthly payments of $6,250.

Hard Money Loan Example

Let’s see how a Hard Money Loan works in action:

Scenario: Sarah, a house flipper, finds a fixer-upper selling for $150,000. She thinks she can sell it for $250,000 with some renovations.

What She Needs: Sarah needs $150,000 to buy the property and $50,000 for repairs.

The Loan: A private lender offers Sarah a Hard Money Loan for $200,000 with a 10% interest rate for one year.

Total Interest in a Year: $20,000.

The Outcome: Sarah buys the property, fixes it up in six months, sells it for $260,000, pays back the loan ($220,000 with interest), and pockets a $40,000 profit.

Are Hard Money Loans a Good Idea?

Hard money loans can be a good idea for real estate investors who need to finance a property quickly or who have poor credit.

However, borrowers should carefully consider the pros and cons of hard money loans before taking out a loan.

Hard Money Loan for Real Estate Investors

Hard money loans are often used by real estate investors who need to finance a property purchase or renovation.

It can be a good option for investors who are looking to close a deal quickly or who have poor credit. However, borrowers should carefully consider the high interest rates and short repayment terms before taking out a hard money loan.

How to Get a Hard Money Loan?

1. Find a reputable hard money lender. There are many hard money lenders out there, so it is important to do your research and find a reputable lender with a good track record.
2. Get pre-approved. Before you start shopping for a hard money loan, it is a good idea to get pre-approved. This will give you an idea of how much money you can borrow and your interest rate.
3. Provide the lender with the necessary documentation. Hard money lenders will typically require you to provide documentation such as your tax returns, bank statements, and a copy of the purchase contract for the property you are buying.
4. Close on the loan. Once the lender has approved your loan, you will need to close on the loan. This process is similar to closing on a traditional mortgage.

Tips for Getting Approved for a Hard Money Loan

Here are some tips for getting approved for a hard money loan:

• Have a good down payment. Hard money lenders typically require a down payment of at least 20%.
• Have a clear exit strategy. Hard money loans are short-term loans, so the lender will want to know how you plan to repay the loan.
• Be honest and upfront with the lender. Hard money lenders are more likely to approve borrowers who are honest and upfront about their financial situation.

Hard money loans can be a good option for borrowers who need financing quickly or who have bad credit. However, it is important to be aware of the high-interest rates and fees associated with hard money loans.

Hard Money Loan for Fix-and-Flips

Hard money loans are also commonly used by real estate investors who are flipping properties.

Fix-and-flips are properties that are bought and then renovated in order to sell them for a profit. Hard money loans can be a good option for fix-and-flip investors because they can be obtained quickly and with less paperwork than traditional mortgages.

Hard Money Loan with Bad credit

Hard money loans are often available to borrowers with bad credit. This is because hard money lenders are more willing to take on the risk of lending to borrowers with poor credit history.

However, borrowers with bad credit should be prepared to pay higher interest rates and fees on a hard money loan.

What are Hard Money Lenders?

Hard Money Lenders are the companies that loan money to fund real estate investors for financing their real estate assets usually for a short term.

In most cases, a hard money lender (HML) is a small group of investors or even an individual. and not a bank or traditional financial institution.

Conclusion

Hard Money Loans are like real estate shortcuts. They can help you buy properties fast, even if your credit isn’t perfect. They are often more expensive than traditional mortgages and can be obtained more quickly and with less paperwork.

But they’re not without risks, so be careful and choose your lender wisely. With the right approach, Hard Money Loans can be a powerful tool for your financial goals.

Borrowers should carefully consider the pros and cons of hard money loans before taking out a loan. Hard money loans should only be used when other options are not available.

Best Hard Money Loan Lenders

#1. New Silver Loan

New Silver Loan is a US-based fintech company founded in 2018 that provides fast and easy financing to real estate investors.

They specialize in fix-and-flip loans but also offer loans for other types of real estate investments, such as rental properties and development projects.

They use software that accelerates, automates, and streamlines loan origination while using data to reduce the risk of loan default.

» READ FULL REVIEW ON NEW SILVER LOANS

FAQs – Hard Money Loan for Real Estate Investors