What Is Hard Money Lending?
Hard money lending is a form of short-term, asset-based financing. Hard money loans are often used to acquire real estate for fix-and-flip projects and other types of investment ventures. Rather than focusing on your personal credit, hard money lenders prioritize the profitability of your investment project.
Read on to find out how hard money loans work and when you should consider applying for one.
What is hard money loan?
Hard money loans are characterized by the following features:
Fast funding process
Due to their streamlined application processes, hard money loans boast record closing times. These types of loans can be closed within seven to 14 days. In contrast, traditional mortgages take an average of 45 to 60 days to close.
Short loan terms
While mortgage loan terms can last anywhere from 15 to 30 years, hard money loan terms are much shorter—often as little as six months. These expedited loan terms are better suited for investment projects with quick turnaround times.
High-interest rates and fees
There’s no denying that hard money loans are more expensive than other types of financing. They have higher interest rates and fees. However, hard money loans can help borrowers acquire properties they couldn’t otherwise. Pursuing a profitable investment project with higher costs is better than missing out on the opportunity altogether.
The monthly payments on hard money loans only go towards interest. The principal amount is due after the loan term is up. Balloon payments like this are often more financially feasible for borrowers when their investment property is sold or refinance.
How does hard money lending work?
If this type of conventional financing appeals to you, you may be wondering how it works. Hard money lending works similarly to other types of lending—the process is just streamlined.
Hard money loan applications can be completed online. Once you submit your application, you can expect a swift response. Here at The Hard Money Co., we get back to our applicants within 24 hours. After reviewing your application, your hard money lender will let you know if you’re approved. Your property’s after-repair value (ARV) is the main consideration, so you’ll most likely get approved if your real estate investment plan is sound.
Once you’re approved, your loan will be funded in as little as 10 days. At that point, you can start using it to fund your project. Throughout your loan term, your conventional lender will maintain a lien position on your investment property to ensure they get paid out first.
What Is A Hard Money Lender in Real Estate?
Hard money lenders are typically private individuals or companies that want to loan out their capital for profitable projects. While they all share similar motivations, not all hard money lenders are made equal.
Here are a few green lights to look for in a hard money lender:
They clearly define their terms and conditions
When you know the exact cost of your financing, you can factor it into your investment budget from the start. Here at The Hard Money Co., we outline our loan terms explicitly and allow you to use our loan calculator so you can estimate your financing costs from the get-go. Unfortunately, not all hard money lenders are this transparent.
They build a relationship with you
When large sums of money are involved, it’s important to know who you’re working with. At Hard Money Co., we’ll reach out to you within one day of receiving your application so we can start learning about your financing needs. Throughout the private lending process, you can contact us by phone, text, or email at any time. By working together closely and maintaining strong communication, we can close on your loan fast and get your project underway.
They have positive reviews and repeat borrowers
Some hard money lenders can make a positive first impression, but they may not have a proven track record to back it up. One of the best ways to evaluate a hard money lender is to check their reviews. Repeat borrowers are also a positive sign, since they indicate reliable performance. At The Hard Money Co., over half of our borrowers come back to us again, which is quite high for this industry.
What Is Hard Money In Real Estate?
Hard money is most commonly used for real estate investments. It’s well-suited for these endeavors for two reasons:
That’s because they’re:
Banks, credit unions, and other traditional lenders have lengthy application processes. To mitigate their risk, they need to run thorough credit checks, require appraisals, and verify your income and employment.
Traditional lenders often have stringent eligibility requirements. If you don’t have a high credit score, steady job, or stable income, you may not qualify for one of their mortgages.
Banks are also very discerning about the types of properties they’ll finance. You may be eager to transform a distressed dive into someone’s dream home or a lucrative rental, but banks may not be as willing to take on these assets.
In addition to credit, banks carefully consider your debt-to-income ratio (DTI). You may not qualify for a traditional loan if your DTI is above 43%.
If you’re an ambitious real estate investor who wants to pursue multiple real estate projects simultaneously, your DTI may quickly get too high for traditional lenders’ taste.
Traditional lending doesn’t consider the after-repair value.
They’re only interested in how much the property is worth as is. This causes them to deny loan applications on high-potential distressed assets.
Since traditional lending presents many obstacles, hard money lending is a fantastic alternative.
Who Can Benefit From A Hard Money Loan?
Anyone who needs fast funding to finance an asset-based investment project can benefit from a hard money loan.
Some of these groups include:
Real estate developers
BRRR (Buy, Rehab, Rent, Refinance, Repeat) investors
Other investors in real estate
Regardless of your specific investment strategy, hard money can help you obtain the assets you need to pursue a profit project.
Benefits of Hard Money Lending
Hard money has many benefits over other types of traditional financing, including:
No credit check
If you’re worried that your credit will disqualify you from a loan or set back your project’s timeline, you’ll appreciate that hard money lenders don’t use credit checks during their application process.
No verification of income and employment
Traditional lenders often comb through your income and employment history from the past two years to ensure you’ll be able to pay them back on time. Not only is this process time-consuming, but it may prevent you from qualifying for the loan if you don’t earn a steady income from a salaried position.
Real estate appraisals are another cumbersome step in the traditional mortgage lending process. Not only do they take a lot of time, but you have to foot the bill. Real estate appraisals can run you a few hundred dollars.
At Hard Money Co, we use free, internal comparative market analysis (CMAs) in place of traditional home appraisals. Our CMAs focus on a property’s ARV, rather than its market value upon sale. As a result, your project’s vision will be factored into our final decision.
Hard money makes it easy to use other people’s money to make your project a reality, reducing your personal risk exposure and expanding the scalability of your ventures.
As we’ve mentioned, one of the most attractive advantages of hard money loans is their quick closing times. At The Hard Money Co., our lending timeline is even faster than many other hard money lenders.
Sources of Funds For Real Estate Projects
In addition to hard money loans, you can obtain the funds for real estate projects from:
Traditional loans are always an option available to real estate investors. With their low-interest rates and lengthy loan terms, they may even be the best option under certain circumstances. However, their slow application process and strict eligibility requirements are downsides you need to take into consideration.
Personal capital can come from your bank account or friends and family. In either case, using this type of money to finance an investment can expose you to a lot of risks. Leveraging other people’s money is a much safer route if you can find a way to make it happen.
As you can see, hard money lending combines the reduced risk of traditional financing with the speed of personal financing, making it an ideal option for many investors.
What is The Hard Money Co.’s Lending Process?
If you want to work with a hard money lender, The Hard Money Co. is up for the task. We’re prepared to finance up to 65% of your property’s ARV and 100% of your repairs if your investment project meets our qualifications.
If you’re ready to get your project underway, simply apply on our website. Just make sure to review our loan terms first. You can also use our handy Hard Money Loan Calculator to get an idea of the type of financing we can offer you. After you apply, we’ll get back to you within 24 hours. We work quickly on your behalf because we understand the time-sensitive nature of real estate transactions.
Are you ready to get started? Apply with The Hard Money Co. today.
⁰¹ The Mortgage Reports. How long does it take to close a mortgage? Timeline to close.
⁰² The Mortgage Reports. What’s a good debt-to-income ratio for a mortgage? What lenders want to see.