Hard Money Loans: Everything You Need to Know about This Popular Alternative to Traditional Financing
If you think of shady deals and questionable characters every time someone mentions hard money loans for real estate investors, read on.
While hard money loans aren’t subject to the same regulations or carry similar requirements as a mortgage or traditional financing agreement, a reputable lender offers trustworthy service and benefits that standard financing deals can’t touch.
However, it’s important to consider the differences between hard money and other structured financial arrangements.
In this guide, we’ll cover everything you need to know, including what makes these loans different and how to find to the best hard money loan lenders.
Let’s get started!
What is Hard Money?
Hard Money is an asset-based loan secured by real property. Most lenders focus on short-term financing with terms ranging between 3 months and 5 years.
Although they are subject to usury laws, hard money loans are subject to less regulations in many states.
This makes it possible to qualify for a loan through private hard money lenders or companies when banks or other financial institutions might otherwise turn you away.
Less regulations and red tape also means faster approval. The process only takes a few days or weeks from application to funding.
This makes commercial hard money lenders a popular choice when you need to close a deal or obtain funding quickly.
How Does Hard Money Work?
As mentioned above, hard money loans are typically secured by a lien on property.
Many lenders specialize in one or two types of property. Depending on the lender, property types can include:
- Single-family residential
- Multi-family residential
Lenders often require loans on the property in the first position. While second-positions loans are possible, you’ll likely face higher fees due to the added risk for the lender.
In most cases, lenders will look at the value of the property and lend up to 65 to 75% of its value. This is known as the loan to value (LTV) rating. If you’re planning to improve and sell the property, such as a fix and flip, some will base lending amounts on the after-repair value (ARV).
However, it’s important to consider your financial needs and ability to repay a hard money loan when looking for a good lender as higher LTV ratings often feature higher interest. If you’re unable to pay off your loan quickly, you might end up paying more in the big picture.
Much like LTV ratings, down payments differ from lender to lender as well. However, in most cases, the lower your down payment, the higher the interest and points on the agreement.
When finding a hard money loan for your next investment project, understanding the terms of the agreement and your exact financial needs are critical to finding the best options.
If you’re unsure about how to proceed, consulting with a structured financial specialist is often worth the cost. You might even save more than you spend for the consultation!
What Requirements Do Hard Money Lenders Look For?
Exact requirements vary from lender to lender.
While most will request a credit check, hard money deals are often assessed on a case-by-case basis instead of looking at your credit history. Equity in the property you are using for collateral can further strengthen your position when sourcing a loan.
These requirements reduce the impact of foreclosures or other marks on your record. If you can prove your ability to repay the loan in a timely manner or have capital to cover the interest, you’ll often find hard money lenders willing to work with you.
Like traditional financing, a down payment and the ability to cover closing costs also improve your chance for approval and may reduce costs over the term of the loan.
How Do Hard Money Loan Costs Compare to Traditional Financing?
Due to the increased risk on the lender’s behalf, hard money loans often cost more than traditional financing arrangements. You’ll often see interest rates in the 10 to 18% range. Origination fees, servicing fees and closing costs might be higher as well.
Due to shorter repayment periods, payments might also be higher than a similar long-term financing agreement. Though whether this adds to the overall cost of the financing agreement will depend on exact terms.
These traits make hard money loans best for short-term investment projects. However, they can be used as a bridge loan to secure a property or stabilize your financial situation until a long-term solution is found.
Why Use Hard Money Loans?
We’ve already mentioned how hard money loans can benefit you if your credit is less-than-perfect. However, there’s another benefit that traditional bank-based lending can’t touch—speed.
Since there are fewer regulations and different risk assessments, you can obtain a loan in just a few days. While you won’t always find an option this quickly, most lenders offer decisions in less than two weeks.
That’s nearly half the time of most bank mortgages and loans for a hard money loan Charlotte, NC business owners and entrepreneurs!
This makes these solutions particularly popular in competitive real estate markets. While other bidders are securing long-term funding, a buyer can secure a loan and have money to put on the table in just a few days.
This speed also makes it ideal for avoiding foreclosures as the capital from a hard money loan can stop the foreclosure proceedings long enough to find a long-term solution.
Finding a Reputable Hard Money Lender
As with any service, who you choose to work with will impact your experience. This makes it essential to find a lender suited to your property type and who is willing to work with you to secure the best financing terms.
If you’re looking for a list of lenders in your area, you can simply type “hard money lender” plus your city or state (For example, “hard money lender greensboro nc”) into any search engine. But this won’t always help you find who you can trust and who offers the best rates.
You might also check with your local Real Estate Investors Association for networking events or seminars. However, these take time and money. In the end, you’re still left doing most of the legwork.
UT Financial Services, LLC, takes the guesswork out of finding a lender or other structured financing solutions. From short-term options, such as hard money loans, to long-term solutions, such as permanent financing, we strive to create value with every interaction.
Whether you’re on the sunny coasts of California or the busy streets of New York city, we provide services nationwide to help investors reach their goals. All without hours of researching, endless calling, stressful deal making and the long waiting times of traditional financing.
We specialize in structured financing solutions starting at $500,000 based on commercial property with terms ranging from 1 to 30 years. Our extensive relationships with private investors, access to institutional capital and more than 20 years of experience allow us to provide options you won’t find anywhere else.
If you’re in need of a hard money loan for your next investment project, call us or submit your contact information below! One of our analysts will get in touch to assess your needs and highlight options available to you.
This website and blog is a publication of UT Financial Services, LLC. Information presented is believed to be factual and up-to-date, but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed.
Purpose of this blog is to give general education and information about investing and business financing. Information on this website and blog do not involve the rendering of personalized investment advice. No content should not be construed as legal or financial advice.
Consult a professional advisor before implementing any of the options presented.