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What is a Hard Money Loan?

By Arvin Sahakian · Jun 5, 2015 · Mortgage

What is a Hard Money Loan?

Image courtesy of Flickr, Tax Credits

A hard money loan is a type of quick financing secured by a property. Understanding how this loan differs from others will help you determine if it's a good option for your needs.

There are many different types of loans that can help homeowners with their financial needs. One of the less commonly used loan types is a hard money loan. Even though it is not as common as a traditional mortgage, it can be a valuable tool when utilized in the right situation.

Definition of a Hard Money Loan

A hard money loan is a short-term loan to satisfy quick financing needs or financing needs of borrowers after being denied by traditional lenders. Hard money loans are also known for having very little underwriting requirements. These loans are secured by the value in your property and not your credit worthiness.

Hard money loans tend to have lower loan-to-value (LTV) ratios because the property itself is used as their protection against defaulted payments.

Finding a Hard Money Lender

Typically, traditional lenders do not offer hard money loans among their various programs. The average borrower may find it difficult to find this type of financing as easy as a traditional loan.

Private investors and lending institutions who specialize in hard money and other custom financing programs are the best options for this type of financing.

One source you can use is the Scotsman Guide, which is typically for industry insiders, but offer a good search engine of hard money lenders for consumers. They will require the following information before they provide results:

  • State for which the property is in
  • Required loan amount
  • Type of borrower you are (such as owner occupied, non-owner occupied, foreign national, etc.)
  • Property type (such as single family residence, condo, townhome, 2-4 unit, etc.)
  • Loan type (such as purchase, refinance, construction, fix and flip, etc.)
  • Loan-to-Value Ratio aka LTV (the loan amount you need divided by the property value)

Common Uses for Hard Money Loans

Hard money loans can have many uses, however, we will list the most common uses of hard money loans for real estate:

  • Purchase Loan
  • Rate & Term Refinance
  • Cash Out Refinance
  • Blanket Loan
  • Bridge Loan
  • Fix and Flip
  • Construction
  • Renovation
  • Home Equity Line of Credit

Advantages of Hard Money Loans

One of the biggest advantages of hard money loans is the ability to borrow for renovations, construction and other "short term" needs relatively quickly.

Another big advantage of hard money loans is the ease of obtaining them. Hard money loans are known for having less strict underwriting standards. In most cases, there is no need for good credit, only a property with enough value that can be held as collateral.

Disadvantages of Hard Money Loans

The biggest disadvantage of hard money loans is the higher interest rates when compared to traditional loans. The rates are higher primarily because of the underwriting standards are less strict and you can get approved on much shorter notice.

Another disadvantage of hard money loans is that many of them will come with an upfront origination fee of 1% - 4% of the loan. The fees are variable depending on the lender you work with.

For Example

If you borrow $400,000 from a hard money lender, you can expect to pay anywhere from $4,000 - $16,000 to attain the financing. Depending on the lender, you may be able to roll this fee into the loan so that you do not have to come out of pocket for the expense.

Finally, the penalties for non-payment or late payment can be quite severe, so you should be cautious about taking out a hard money loan unless you are certain you can repay the loan and make the monthly payments on time.

When Traditional Method Are Not an Option

No matter what your real estate investing goals are, a hard money loan could be a useful tool in helping you reach them when you are faced with difficulties through more traditional lending methods. Using hard money can be one of the easiest ways to obtain, renovate and maintain property-especially for investment. Keep in mind the drawbacks as well as the benefits and you will be more likely to make a smart decision the next time you are in the market for a loan.

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