If you’re not well-informed about the real estate or finance industries, the topic of hard money lending might be a bit perplexing. What exactly is a hard money loan, and how does it differ from your typical bank-funded loan? When discussed between investors, money is considered either soft or hard. Hard money is typically easier to obtain and the terms are fairly flexible. Soft money, on the other hand, is much more restrictive and its terms are quite specific and strict. Most hard money originates from private investors, rather than your average lending institution. The terms of hard money lending vary with each lender. Some companies lend solely on the deal or the value of the property, while others take more than equity into account.

Typically, hard money lenders will support 65% of the after-repair value on a property. Since the loan amounts tend to be advanced in larger amounts, most hard money loans are considered to be short-term. A proposed term of six to twelve months return-time is the lending standard. Interest rates on hard money loans usually range between 12%-18% and are based on risk, assets, and current level of debt. In addition to the initial loan, closing costs are also considered when calculating the rate. It is also very common for investors to offer up other real estate properties as collateral to ensure a larger loan amount. This transaction is known as “cross-collateralization.”

So how do you know if a hard-money loan is the right option for you? In most cases, individuals choose to use hard money when they cannot obtain traditional mortgage financing due to inadequate credit, lack of supporting documents, timeframe of closing, and/or condition of the property. Borrowers should be absolutely certain that they have the resources to pay off the loan when it is due, making an almost spot-on loan amount extremely vital to the process. Estimations made too low cause for a shortage in repair materials and time, while those made too high put the borrower at risk of becoming delinquent.