What Are Hard Money Lenders?
Whether you’re looking for your first real estate investment property or your first home, choosing the right loan and lender for your situation is extremely important. Hard money lenders can bridge the gap between traditional home loans and mortgages and pay out-of-pocket for your property.
Definition
Hard money is all done privately, outside of conventional banking establishments. Typically, this is done by private individuals to the loan seeker.
The average loan term for hard money loans is 12 months as opposed to 30 years for a typical home loan through a traditional lending institution. While there are dozens of hoops to jump through for a typical loan, hard money loans are quicker and require fewer steps to complete.
Often these types of loans are sought out when an investment might not be approved by a traditional institution. Hard money loans and lenders secure the loan by looking at the property and its value, the investor’s credit score, and any collateral you put up. The amount of the overall loan is determined by these factors.
How to use your hard money loan
Just as every person is different, every loan application, even for hard money loans, is unique.
Hard money can be used in any number of ways but the most popular are house flipping, property development, and personal loans.
House flipping
Speed is the name of the game when it comes to house flipping and hard money loans and lenders are quick to jump in on these types of opportunities. Today, many real estate investors are utilizing hard money loans for their investment properties.
With a short hard money loan, house flipping naturally lends itself to being profitable in this situation. By using the money to spruce and fix up the house, then getting it back on the market quickly you’ll be able to repay the loan without incurring much for the interest.
Property development
By using the up-front money from a hard money loan, property development and new construction can take off. But because of the often unpredictable nature of construction projects, a hard money loan is riskier for both the lender and investor. Building quickly and on schedule is crucial to using a hard money loan for property development.
Personal loan
Hard money loans are often taken out to finance renovations or repairs that wouldn’t be covered under a traditional loan. Keeping track of your expenses is crucial as repaying the loan happens quickly and costs can be steep with the shorter loan period.
Who does hard money loans?
There are several large private lending firms that do hard money loans across the country. Here at Global Integrity Finance, we’re funding hard money loans everyday.
In addition to nationwide companies, local private lending institutions may offer hard money loans for your next project that connect you with lenders in the community.
There are several things to consider when choosing a hard money lender and questions you can ask to determine if their services are right for you.
Are you the actual lender or just a broker?
Lots of hard money and investment firms work as brokers between lenders and investors. Making sure you know who is lending you the money and who is just handling the deal can help you determine how much or how little your lender will be involved.
What project details or documents are needed for a quote?
Because the value of the loan is determined by the value of the property and the subsequent renovations, the lending institution will need to see some plans and projections to determine the size of the loan. Be prepared to bring the needed paperwork to get a quote from the hard money lenders.
How do you handle interest?
When looking at a loan, you always need to factor in interest. Some institutions charge interest monthly or at the end of the loan so asking what the hard money lenders are planning to charge and when they expect it to be due, is crucial to planning for your finances.
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Takeaway
Finding financing for your first home or your next investment project can seem daunting. Hard money loans bridge the gap between out-of-pocket spending and traditional home loans by offering short-term loans with fewer restrictions and requirements.
While the loans have fewer restrictions and requirements they have a much shorter period to be paid back and costs can be steeper. Hard money lenders can be found in nationwide companies or smaller lending establishments in your community but be sure to ask pointed questions so you’ll be prepared.
Interested in rental financing? Check out our Long-Term Rental Financing page
