What is a hard money lender?
A hard money lender is a private investor or company who funds loans secured by real estate. Hard money lenders typically charge higher interest rates than banks, but provide loans that most banks would not make — allowing the borrower to receive funds more quickly and requiring less documentation than banks.
Hard money lenders are sometimes called “asset-based lenders” because the collateral for their loan is based on the desired property. Traditional banks instead require strong collateral, excellent credit, and cash flow from the borrower. Repayment of the underlying loan usually stems from the borrower’s income.
When is the best time to use hard money?
Borrowers should consider a hard money loan instead of a traditional bank loan in scenarios that require access to quick capital to entice the seller of a desired property with an all-cash purchase.
What are advantages of hard money lenders?
- A simpler application process and quicker approval/disapproval decision, sometimes the same day.
- Less scrutiny of the borrower’s personal financial situation (including income and historical tax returns, etc.).
- Most hard money lenders do not expect perfect credit and substantial amounts of disposable income from borrowers, but instead focus on the merits of the specific deal under consideration.
- Self-employment is not seen as unacceptable to private lenders, whereas many banks view self-employment negatively and strongly prefer lending to professionals with very steady income.
- Borrowers can allocate less time to seeking financing and avoid rejection by a bank.
How do I distinguish a reputable hard money lender from an unscrupulous lender?
To distinguish a good short-term lender, be sure to check their Better Business Bureau (BBB) rating and ask a lot questions. Good hard money lenders have expert loan consultants who will walk you through the process and provide transparent, easy-to-understand answers.
Why can’t I just go to a traditional bank lender and get my deal done?
Banks generally require both strong collateral and a proven history of excellent credit and cash flow. Furthermore, banking institutions may not provide the combination of speed of capital and quick decision making. Hard money lenders are the opposite of banks. They offer more flexibility. They don’t require appraisals or investor experience and their primary focus is on the collateral for the loan – no matter what condition the property is in. Hard money lenders also have the ability to fund a loan quickly – which can prove to be a major benefit when you’re in the midst of closing a time-sensitive real estate deal.
Is hard money only for desperate borrowers?
No, not at all! Sometimes, hard money or bridge loans can be a preferred means of financing transactions for real estate investors when leveraging their personal cash to invest in multiple deals, instead of just one.
Examples include: commercial bridge loans, land loans, residential rehab or new constructions loans.
How do hard money lenders decide how much to lend?
Most hard money lenders make lending decisions based on the Loan-to-After-Repair-Value (LTARV) ratio and not the borrower’s personal finances. The LTARV ratio is the estimated value of a property after renovations, which takes into consideration the value of several comparable homes in the area during the previous six months.
How do private money lenders make money from my loan?
Hard money lenders earn their living by servicing your loan on behalf of their investor. A 12% interest rate on an annual loan equates to a 1% interest rate per month based on the amount of loan funded.
What are other terms for hard money loans?
Hard money loans are also sometimes referred to by the following terms: (1) private money loans; (2) bridge loans; (3) short-term loans; (4) transitional loans; (5) asset-based loans; (6) rescue loans.
What other fees may be associated with a hard money loan?
Loan fees can range from 2-4 points, with any additional points above this range usually signaling that there are numerous brokers involved in the transaction.