Hard Money: What Is It and How Do Hard Money Loans Work?

Most real estate investors hear terms that they don’t understand in the beginning. One of these terms, hard money, is little understood, and frequently asked about. Here is a great explanation of hard money.

What Does Everyone Mean by Hard Money? What is Hard Money

Hard money lenders (HMLs) are typically private individuals or small groups that lend money (Hard money) based on the property you are buying, and not on your credit score. Usually these loans cost (percentage-wise) much more then an average mortgage, often times up to twice what a regular mortgage does, plus high origination fees.

Who Needs Hard Money

Developers and house flippers, amongst others, will use it to fund deals because you can often borrow up to 100% of your purchase price! On the other hand, hard money lenders will frequently require you to back up your loan with real assets. If you know you can buy a property and turn it quickly at huge profit, and you can’t get a standard mortgage, it might be one way to go. Some investors use hard money to get into the property, do some quick fixes to raise the property value, then get a new loan (based on the property’s new, improved value) from a bank to pay off the hard money lender.

In Other Words . . .

Hard money loans are easily accessed and cut through the red tape. If you can develop a relationship with a LOCAL hard money lender, you can get funds within a couple days, and sometimes with no appraisal or other costs (except for origination fees of course).

Now different HML’s have different requirements and protocol. There is a local HML that only charges 12% interest and 1 point origination if you keep it over a year and 2 more points if you keep it less than a year. He only does 30 year notes, and obviously he wants you to keep it. He has over 1100 notes, so he doesn’t want the hassle. He wants his money to stay loaned out. I have also worked with another local HML who doesn’t charge any points, but he’s extremely fickle and can be hard to work with.

Now the typical HML will charge somewhere right around the usury rate. In Texas its 18% annual, so most HML’s will charge 5% origination and 13% interest on a 1 year note or no points upfront and 18% interest with a shorter call. Now they can get around usuary by shifting their origination fee into a commitment fee (little different protocol), but most HML’s don’t know this.

The beauty of HML’s is that the loan is normally not based on your credit score (especially with local lenders) or at least not on your credit worthiness (assets and income), you can receive funding within a matter of days (normally about 7-14 days) rather than 30 days+, and you can get a loan on any piece of junk that you find. You also are not normally dealing with a processing team. You deal directly with an individual lender. If he or she says yes, then you have the loan. This is quite advantageous versus going through an entire loan committee process or underwriting process.

HML’s on longer term investments are not a good idea, but for short term flips, rehabs, or for the initial purchase, they can be a very strong tool. I started my investing using HML’s, and have made very good money using them. I now use mostly a line of credit from the bank, but it took me several years to work into that. I also now do some local hard money lending to other investors.

Thanks to Ryan Webber for his explanation “in other words” (from our forums)

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.