What Is Hard Money Lending?

Key Takeaways

  • Hard money lending is the process of securing real estate financing through an individual or private investor, as opposed to a financial institution.
  • Hard money lenders use the value of a property as a governing factor for the loan, not the credit worthiness of a borrower.
  • Appealing to hard money lenders works best if you know your numbers and have an accurate breakdown of how the loan will be paid back.

Many investors looking for alternative financing that doesn’t involve their local bank may have heard the term “hard money.” They may have even asked themselves a simple followup question: what is hard money lending?

Hard money lending is a short-term loan obtained from private investors or individuals, at terms that may be more strict than a traditional loan. Though the terms of this creative financing option may be stricter, this form of private financing for real estate generally has more lenient criteria.

In this article, we will definitively answer the question “what is hard money lending,” and how you can use it to help you broaden your ability to find real estate financing options and boost progress of your investing career.

Investor Q&A: What Is Hard Money Lending?

Creative financing real estate

1. The Big-Picture of Hard Money Lending

Hard money lending is another way an investor can finance their real estate projects, outside of the traditional mortgage means. This is a short-term loan secured from private investors or individuals, as opposed to other traditional institutions like banks or credit unions.

Hard money lending is often used by investors who aim to improve or renovate a property, then sell it. Given that you can usually get a loan in a matter of days (as opposed to weeks from banks), this is a fine choice for house flippers and real estate developers.

This is also an option for investors who only need to do quick fixes to raise a property’s value, then secure another loan based on the new value to pay off the hard money lender.

2. Hard Money Lending Vs. Other Lending Types

The main difference between hard money lending and other types of loans is that this type of financing does not focus on your credit history or income as collateral.

Instead, lenders will see the property’s value as the determining factor, placing emphasis on its after-repair value (ARV). ARV is the worth of the property once your renovations are done.

Other differences include:

  • Hard money lenders do not invest in primary residences. Owner-occupied residential properties are subject to many rules and regulations, thereby increasing the risk for lenders.
  • Hard money lenders do not sell loans to Freddie Mac or Fannie Mae. More often than not, lenders use their own money or raise it from a pool of investors. The amount they loan are based on their property specialization (if there are any) and the risks they are comfortable taking.
  • Hard money loans are short term. You will not have the luxury of 15 to 30 years to repay your loans. Hard money loans are typically needing to be repaid anywhere between 6 to 18 months.
  • Hard money lenders have their own lending criteria. A private lender, for example, could be your friend, family, or business associate. As such, they may not have any preset criteria before lending you money, giving you more flexibility in negotiating terms. Hard money lenders, on the other hand, come with a specific set of upfront points, interest rates, and defined durations.

3. How The Process Of Hard Money Lending Works

Given that these are private individuals, every hard money lender is different. As stated above, these lenders come with their own requirements, which include the process they need to close the transaction.

To give you a general idea, this is the usual course hard money lending takes:

  • Step #1: Find a hard lender near you. Do not let the rejection of a bank loan drive you to desperation. Research and make sure the lender can be trusted. Do they have a legitimate website? Are they in good standing with their own investors? Do they have pending lawsuits over bad loans?
  •  Step #2: Arrange a meeting with the lender. This is also the time when you can inquire whether they specialize in a kind of investment property or if they have worked with projects previously that mirror yours. Assess the time frame specified for the loan and see if this is something you can work with.
  • Step #3: Prepare a contract. Make sure that you are offering a good deal with a sound financial plan.
  • Step #4: Inform the lender of your contract price. Most lenders are willing to fund 60 to 70 percent of the property’s ARV. The remaining 30 to 40 percent is up to you. You will increase your chances of getting approved if you already have this at hand.
  • Step #5: Get the property appraised. The lender will either send a list of their trusted appraisers or have their own.
  • Step #6: Prepare additional documents needed. Some lenders may require that you present other documentations, like W-2s, bank statements, pay stubs, etc.
  • Step #7: Wait for lender’s approval. If it is a deal that the lender finds satisfactory, then they will inform you of the amount and terms for payment.
  • Step #8: Consult with a lawyer. Make sure that you are legally protected, especially after getting the lender’s counter offer.
  • Step #9: Close the loan. This will be done typically at a title company or a lawyer’s office. The lender will then put the money into escrow at the title company. The title company would make sure all paperwork is completed, and that checks issued to all parties involved. Additional costs may include any closing fees and property insurances.

More often than not, lenders grant money to properties that will not be in the market for long, that have good selling potential. Make sure your team budgets ample time to complete renovations. There’s no sense in coming up with unrealistic projections. This can not only set you back financially, but possibly burn a possible future relationship with your hard money lender.

The Name Does Not Say It All

Hard money lending, despite its name, does not mean that it’s difficult or onerous. It just means the terms are strict; the efficacy of the loan is all about the value of the property (not your credit worthiness).

What is hard money lending? It’s a simple question without a simple answer, but something you must figure out if you are to invest at a higher level. In understanding the concept of hard money lending, you’ll be that much more informed about your real estate financing options. And perhaps that much closer to your next profitable deal.

Have you ever had the option to use hard money lending? Did you like the results? Let us know in the comments below how your last hard money transaction panned out.

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