Housing

What Is A Hard Money Lender In Real Estate?

Caitlin Lamb Jefferson

Published: June 4, 2024 1:20 pm

Nearly 80 percent of today’s homebuyers finance their purchase, as do many real estate investors, most commonly with a fixed-rate loan. When it comes to purchasing real estate, investors and private home buyers have many options for financing. One common type of financing is available through hard money lenders. While a common term in the world of real estate, first-time investors or home buyers may be unaware of this financing option and its purpose. As with any type of lender, hard money lenders offer loans that can be beneficial to some buyers but that also comes with some drawbacks that borrowers need to be aware of. If you’re thinking about investing in real estate in the future, understanding what hard money lending is and when it can be beneficial is a must.

Why This Matters

Hard money lenders are a common resource in the real estate world. With this type of lending, the loan is secured by the property rather than by the buyer. This means that instead of securing a loan based on the buyer’s creditworthiness, the loan is based on the property’s value, with the property serving as collateral for the loan.

Like any type of loan, hard money loans serve a specific purpose in the real estate market. They are designed to offer a faster lending option but with a shorter term. Whether you are a real estate investor or a home buyer, there are many situations when you might consider using a hard money loan.

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Hard Money Loans: What Are They and When Should They Be Used

Different types of loans vary in the length of the term. This is one thing that sets hard money loans apart from other types of lending. Normally, hard money loans are short-term, with terms ranging from six months to several years. They are more common in transactions when fast funding is necessary, such as when an investor is trying to secure a good property in a competitive market.

Often, hard money loans can be processed in as little as a few days, offering a fast way to get funding for a project. Hard money loans are especially useful for those who want to jump on an investment opportunity but can’t wait for traditional financing. 

Like many types of lending, hard money loans are not a one-size-fits-all solution. Instead, there are different types of hard money loans, each with its own specific purpose. For instance, a bridge loan provides temporary financing until a more traditional long-term loan can be obtained. In this instance, a homeowner might use a bridge loan to purchase a new home and then obtain a more traditional loan after selling their previous home and cashing in on the equity. Real estate developers might also utilize construction loans, another type of hard money loan, to fund new builds. Home renovators often use fix-and-flip loans to fund renovations on a property so that it can be revamped and sold quickly.

How Can You Obtain a Hard Money Loan?

Applying for a hard money loan is similar to applying for other types of lending. Investors first choose a property that they are interested in purchasing. Then, they choose a hard money lender and present the property. Instead of evaluating the investor’s creditworthiness, the hard money lender will evaluate the property itself and the potential of the proposed project if a renovation or build is going to take place.

To obtain a hard money loan, you’ll need to be purchasing a property with a value that the lender will recognize as a good investment opportunity. In addition to providing fast short-term loans, hard money loans may also be a good option for borrowers who do not qualify for other forms of lending, whether due to their credit history or other financial issues or obligations.

When Should You Use Hard Money Loans?

While hard money loans might be an option for those with a poor credit history, because they are short-term loans, they aren’t a substitute for other types of lending. They are often used by businesses to fund construction projects or real estate firms to purchase properties to sell. However, there are a few situations when hard money loans make sense for individual investors as well.

If you are a real estate investor looking to purchase and renovate a project that should take anywhere from a few months to a couple of years, a hard money loan can be a good option to fund your project. Another instance when a hard money loan makes sense is if you want to act fast on a good investment opportunity, but you can’t wait to complete the process of applying for and waiting to receive other forms of lending. In this instance, a hard money loan can help you jump on an opportunity to purchase a property. 

Understanding Hard Money Loan Rates and Terms

Like any type of loan, the rates and loan terms that you can expect to get with a hard money loan vary widely. However, because these types of loans are a bigger risk for lenders than traditional mortgage loans, interest rates tend to be higher. They often range from 8% to 15%. Hard money loans also require upfront fees to be paid, which usually total somewhere between 2% and 4% of the loan total.

Hard money loans are almost always short-term lending options. Your loan terms may stretch anywhere from six months to a few years and are not designed to replace long-term, traditional mortgages.

Should You Work With a Hard Money Lender?

Hard money loans can be a great tool to help investors get fast financing or fund a fix-and-flip project. But as with any lending, it’s important to consider both the benefits and drawbacks of hard money loans.

Pros of a Hard Money Loan

There are many benefits of these types of loans, including: 

• They provide fast funding, often within days. This allows investors to act quickly on good investment opportunities. If you’re taking on a shorter-term project, such as buying and renovating a home to sell, the quick approval and short terms of a hard money loan can be a great option. 
• The terms of hard money loans may be more flexible than traditional loans, including more repayment schedule options. 
• When you apply for a hard money loan, your credit score or finances are not in question. Instead, the home acts as collateral. This makes these loans an option for those who cannot qualify for traditional loans. 
• Hard money loans usually do not have prepayment penalties. This means that you can pay off the loan early without paying a penalty if your project moves faster than anticipated.

Cons of a Hard Money Loan

Like many types of real estate loans, there are some drawbacks to hard money lending, including:

• Interest rates are often higher because the risk to the lender is higher.
• Repayment schedules are often much shorter than traditional loans, which means that investors must have a plan to be ready to pay them off.
• With the property as collateral, you’ll lose the property if the loan isn’t paid.
• Hard money loans are not an option for long-term investments and rarely have terms that last longer than a few years. 

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How to Find a Hard Money Lender

While hard money loans may be less common than traditional types of lending, it’s not difficult to find a hard money lender. There are a number of places where investors can look for one.

One option is to ask your real estate agent or Realtor if they work with a hard money lender. Even if they don’t frequently work with one, it’s likely that they know of some in your area.

Another option is to attend REIA or MeetUp Meetings, where hard money lenders often speak to agents and Realtors about their lending options. If neither of these is an option, do an internet search for hard money lenders in your area. Just make sure to do your research to ensure that you’re choosing a reputable company.

Other Lending Options

If a hard money loan isn’t for you, you have several other options besides traditional real estate loans. Home equity loans, for instance, allow you to tap into the value of other properties you own. To obtain a home equity loan, you’ll need to get the value of your property evaluated, and take a look at how much equity you’ve built. But if you qualify, a home equity loan is likely to have a lower interest rate than a hard money loan.

FHA loans, or Federal Housing Administration loans, are a type of funding available to certain home buyers. FHA loans are more difficult to qualify for because they have strict requirements. However, they don’t consider previous financial issues, such as bankruptcy, during the application process.

Another type of loan available to specific borrowers is a VA loan. These loans are backed by the Department of Veterans’ Affairs and are available to qualified veterans, active duty service members, and their spouses. These types of loans often have much lower interest rates, an easier application process, and do not require a down payment.

Frequently Asked Questions

Do all lenders offer hard money loans?

No, because hard money loans are non-conforming loans, you won’t find them offered by mortgage lenders or banks. Instead, hard money loans are available through private investors or companies specializing in this type of lending.

What happens if you default on a hard money loan?

Hard money loans use the property as collateral for the loan. As a result, if you foreclose on the loan, the lender will take possession of the property or put it up for sale via an auction.

Can you use a hard money loan to pay for home repairs?

Yes, a hard money loan can be used for home renovations and repairs. While hard money loans are often used to purchase properties, you can also apply for a hard money loan to cover the cost of renovations to your home or investment property.

Will a hard money lender run a credit check?

While a hard money loan is based on the value of the property you are trying to purchase, the lender may still check your credit score and finances. However, with the property acting as collateral for the loan, lenders are much less rigorous about their credit score or financial history requirements than they would be for traditional forms of lending. Not all hard money lenders will check your credit information.

Do hard money loans require a downpayment?

Many hard money loans do not require a downpayment. However, others may require a downpayment to secure your loan. Down payments vary from 10% to more than 30% of the loan amount. In some cases, having a strong credit score can help you qualify for a lower down payment. Providing a larger down payment may help you qualify for a better interest rate and loan terms.

Final Thoughts

Hard money loans can be a useful tool for private home buyers and real estate investors who need fast funding or a short-term option to cover the cost of a purchase. These lending options provide more flexibility than traditional mortgages and, when used properly, can be great for taking advantage of investment opportunities.