What Is Hard Money Loans

What is A Hard Money Loan Lender?

Hard Money Lenders (HML's) can be an alternative to traditional real estate financing when investing. The term "Hard" in the name Hard Money means that the lender is more concerned with the "hard" asset (the Property) than other aspects of the loan.

Focusing on the property, the decision will or can be made mostly on the after-repair-value (ARV) of a property.

How does this give the investor an advantage? Firstly, you can get a hard money loan without a great credit score. Secondly, you can use a hard money loan for a property that needs to be rehabbed and finance in those costs. This makes hard money loans ideal for fix & flip and buy, rehab, rent, refinance, repeat (BRRRR) method.

With traditional financing, a lender wants to insure that is the property is foreclosed on, that they can at least cover the loan amount on the property. Since a hard money lender will take on more risk, they look more at what the value of the property will be in the future. 

Because of the risks a hard money takes with an investor and the short term a hard money loan can be, they will have a higher rate than a traditional mortgage. Your rate will depend a lot on your investment history, number of projects completed, and there are programs for investors that are just getting started.

Another great thing about hard money loans, is that they can close fast.

Hard Money Deal Example:

You come across a property selling for $110k, with $50k in renovations, you can sell the property for $210k, that's an $50k profit (you will have to factor some carrying costs to be deducted from the $50K). Carrying costs can be fees to a real estate agent, if you used one, closing costs, and/or any mortgage or tax payments you have to make until the property is sold.

Let's say you ARV appraisal does come in at the value you assumed it would ($210k) and you qualify for 75% LTV, the hard money lender will agree to loan you 75% of the ARV which is $157,500. Your total deal budget is $160k. this means you would have to come out of pocket with the difference ($2,500).

In conclusion, hard money lenders are a dime a dozen. HML's can say they are the best, have the best programs etc. 99.9% of HML's have access to the same programs...it comes down to relationships and who will be upfront with you on your projects. What this means, if there is bad news, you don't want the lender to hide the issue and try and fix it, you want to know immediately (or at least I do, when it comes to my properties) what is going on so that you both can work as a team to resolve the problem.