Hard money loans are a type of short-term loan commonly used in real estate transactions. As opposed to “soft” money loans that come from banks, hard money lenders are typically individuals or lending companies more comfortable with a riskier loan.
The reason they’re considered “riskier” for lenders is because, while they do sometimes involve a credit history check, the loan is not contingent on the borrower’s credit. Hard money loans use an asset owned by the borrower, typically real estate, as collateral to borrow against. That makes the loan approval process for hard money loans much faster than other short-term loan options. It also means that lenders have less assurance that the loan will be paid back according to the terms.
While terms of hard money loans are often negotiable, they do carry some risk for the borrower, as well. Some key things to keep in mind regarding hard money loans are:
- Most have short repayment times (1-3 years, typically)
- Can be approved very quickly
- Interest rates are higher on hard money loans
- Aren’t tied to banks or borrower credit, only the value of the collateral asset (often real estate)
- They carry a lower loan-to-value ratio, so borrowers don’t receive as large a percentage of their collateral asset’s worth in loans and will owe a larger down payment
- Are not issued by banks, but by individuals and some lending organizations
How to get a hard money loan
The process of securing a hard money loan is similar to applications for any other loan.
- Save the funds for a down payment, which will likely be somewhere in the range of 30-50% of the asset’s value, and any fees associated with the loan
- Prove that you have those funds available
- Find a reputable lender with terms that suit your circumstances
- Apply for the loan and be approved
Hard money loan example
Property flipping, purchasing a house to increase its value with renovations and re-sell, is one of the most common uses of hard money loans. They’re issued quickly and based on the value of the property they’re purchasing, which can give them an edge when bidding for that property. Those funds can also help build funds for quick repairs, so they can cover the cost of renovations with the loan.
Some hard money lenders will issue loans based on the anticipated value of the property once it’s re-sold. This still involves some risk for the borrower, however. If the home sells for a lower value than anticipated, they may not have the funds required to repay the loan in time.
Hard money loans can be useful for quick infusions of cash that aren’t dependent on credit. As with any loan, it’s important to know the terms inside-and-out and have a plan for paying back the loan’s value. This sort of planning will help you find the loan that’s right for you.