What is a Hard Money Lender, and How Does it Work?

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If you are a real estate investor, then you already know how time-sensitive some opportunities can be.

Conventional loans may not be ideal for such situations due to their lengthy and stringent approval procedures. For most real estate entrepreneurs, hard money loans come as a lifesaver in such cases.

If you are new to the concept of hard money as a means of financing, this post will fill you in on all you need to know on hard money, hard money lenders, and everything in between.

What is a hard money lender?

To understand what a money lender is, you need to first understand what a hard money loan is. A hard money loan refers to a short-term loan obtained from non-conventional lenders such as private high net worth individuals or companies.

That said, a hard money lender is an individual or a company that utilizes its capital to fund other people's businesses, mainly commercial real estate. These individuals and companies are independent of any financial institutions and interact directly with the borrowers. If you are not sure where to find local hard money lenders to finance your projects, HardMoneyHome.com can help you locate hard money lenders near you.

How a hard money loan works

Hard money generally works just like other asset-based financings. In hard money loans, the property purchased becomes the collateral, minimizing the risk for the lender and the borrower.

This means that if for any reason the borrower defaults on loan repayment, the lender will sell the property to recover their money.

Hard money loans are generally short-term loans repaid in between six months to two years. Unlike traditional lenders that require a certain threshold of a borrower's creditworthiness before approving a loan, the focus of hard money lenders is the value of the property purchased or the history of an investor's success in similar projects.

The downside to the easy access to hard money loans is that the lenders take more risks, which translates into more expensive loans. Typically, hard money loans have higher interest rates than conventional loans, with 2020 rates being at an average of 11.25%. In some cases, the interest rates could be as high as 15%.

Down payment loan requirements

Like conventional mortgages, hard money lenders require investors to put some money into an investment as a down payment. Down payment requirements often vary from one lender to another. However, the typical rate is 10% of the property's appraised value.

The down payment is calculated on the property's Loan to Value (LTV) ratio basis. For example, if you want to purchase a property with an appraised value of $100,000, the lender will offer a 90% LTV. This means you will have to invest $10,000 in the property before your loan can be approved.

Who should take a hard money loan?

As long as you are eligible, you can take a hard money loan. However, hard money loans are best suited for real estate entrepreneurs that deal with fixes and flips, when you have credit issues but need a loan, or when time is a factor in your project.

Though hard money loans are easily accessible, lenders won't lend just any amount. Instead, they will require to know what your project is and its feasibility. Often lenders will need to get the correct valuation of the property from professional valuers and the cost of renovations, if any from the contractor, before approving your loan.

Conclusion

Although hard money lending is legal, some aspects of the business remain largely unregulated by the Federal Reserve Bank. Therefore, it is essential to practice due diligence when getting into deals to ensure that you get the best value from them.

This article does not necessarily reflect the opinions of the editors or the management of EconoTimes