Hard Money Lenders: What You Need To Read Before You Borrow
6 MIN READ
Published October 05, 2023 | Updated November 09, 2023
Hard money lenders provide short-term bridge loans for real estate transactions. The lenders rely on collateral instead of the borrower’s financial position, so funding is faster than a traditional mortgage. The loans allow borrowers to raise money quickly but can come at a higher cost. The property is used as collateral, and if you default on the loan, the lender can recoup losses by taking ownership of the property.
What Are Hard Money Lenders?
A hard money loan is a non-conforming loan for investment or commercial properties. If you do not qualify for a traditional mortgage or can’t qualify for one, hard money lenders can offer you quick funding in exchange for using the property as collateral. Since it’s a secured loan, you stand at risk of losing the property if you default on the loan.
Hard money lenders usually have less stringent qualification requirements, so they usually offer quick funding. The traditional mortgage process usually takes over a month to close, while you may be able to close in a few days with a hard money loan.
Common Uses for Short-Term Loans
Here are a few common uses of hard money loans:
- Those who purchase properties, repair and renovate, and then resell them for a profit are called property flippers. Property flippers may find short-term loan companies to be an ideal choice because they need cash fast. When bidding on a property, expediency is a must, and hard money loans may help them close as soon as possible.
- Hard money loans are also usually chosen by borrowers who don’t qualify for traditional mortgages from banks. Borrowers who are self-employed and those who have a lower credit score may only have hard money loans as an option.
- In some cases, these loans can also be used to avoid foreclosure. If you have considerable home equity, some lenders may consider offering short-term financing.
How Do Hard Money Loans Work
Asset lenders, private investors, equity companies, and real estate investment lenders offer hard money loans. The lenders you qualify for will depend on whether you’re looking for an individual loan or a business loan and whether the property is owner-occupied.
Hard money lenders usually have a less rigorous qualification process compared to a traditional mortgage. Once you apply for the loan, the lender may check your finances or credit report, but usually, the amount of loan that you can get will depend on different factors such as Loan-to-value (LTV), loan-to-cost (LTC), and after-repair-value (ARV).
Loan approval usually takes days instead of months, but the downside is that the loan comes with higher interest rates, and in some cases, the lenders may require a larger down payment. The loans also have shorter repayment periods, usually 12 to 24 months.
“Hard money lenders and private equity investors are oftentimes much more likely to lend to a borrower who has been successful at paying back hard money loans with that same lender in the past,” explains Brad Reichert, founder and managing director of Reichert Asset Management LLC. “This is because these borrowers have demonstrated to the lender that they have the knowledge and experience to make lending large amounts of money to them profitable, time after time,” adds Reichert.
Pros and Cons of Hard Money Lenders
If you’re planning to approach private money lenders for house flipping or because traditional lenders did not accept your application, it’s best to weigh the pros and cons to make an informed decision.
Pros of Hard Money Lenders
- The qualification requirements are less stringent compared to traditional mortgage lenders.
- Hard money lenders may be flexible when negotiating loan terms.
- You don’t need a lot of documents or excellent creditworthiness to get a loan. Instead, hard money lenders extend credit based on the value of the collateral.
- Hard money loans are processed in just a few days. This speed of funding can be a major selling point for real estate investors when bidding for a competitive property.
Cons of Hard Money Lenders
- The interest rates are higher than traditional fixed-rate mortgages. Closing costs and upfront fees are also likely to be steep, increasing the total cost of the loan.
- Many lenders may require a significant down payment.
- There may be a steep prepayment penalty if you pay off the loan early.
- Hard money lenders typically qualify you for an LTV ratio of up to 70%. This means you’ll need significant assets if you want to qualify for a hard money loan. With conventional mortgage loan options, you may be able to get up to 97% LTV mortgage according to Fannie Mae guidelines.
Top Hard Money Lenders
Some of the best hard money lenders offer short-term loans for a variety of property types. They have the ability to fund in as little as ten days and are open to working with first-time investors. Based on these criteria, here are three hard money lenders to consider:
- Kiavi: Interest rate 9%, Loan amounts $75,000 to $1.5 million, Funding in 10 days
- Baselane: Interest rate 9.99%, Loan amounts $50,000 to $2 million, Funding in 10 days
- RCN Capital: Interest rate 10.24%, Loan amounts $50,000 to $10 million, Funding in 10 days
4 Tips to Pick a Hard Money Lender
When selecting a hard money lender to work with, there are several different things you need to consider. These four tips will help you pick a lender that works for your experience level and funding needs.
1. Go Local or Nationwide
Some hard money lenders operate in a particular local area, while others offer regional or national services. Talk to a title agent, mortgage broker, or realtor for recommendations of a lender in your area. You can also search online to find lenders that provide services nationwide. When searching for a lender, it’s best to compare multiple lenders based on interest rates, qualification criteria, and speed of funding.
2. Learn If You Qualify
While most hard money lenders have an easier approval process and flexible underwriting compared to banks, the qualification criteria can differ for each lender. Here are a few things that lenders usually look for:
- Most lenders will require a down payment of 20% to 30% for residential properties and more for commercial real estate.
- You’ll need enough cash reserves to ensure you’ll be able to make the monthly payments on the flip loan.
- A lender will also prefer a borrower who has experience flipping properties. If this is your first real estate transaction, you may still be able to qualify for the loan if you have a clear exit strategy. You’ll typically have to pay a higher interest rate compared to an experienced investor.
3. Compare Rates
Compared to traditional loans, hard money loans have a higher interest rate. Typically, these loans can have an interest rate of 10% to 18%, which is higher than conventional mortgages. Other than interest rates, you’ll also need to pay origination fees of 2% to 6%. When comparing lenders, it’s best to carefully consider interest rates and fees to ensure you’ll be able to pay back the loan comfortably.
4. Read Reviews
As with any type of financial product, it’s important to thoroughly research the reputation of the lender before you take out a loan. Read the reviews of the company on third-party sites such as Google and Trustpilot to see what previous borrowers have been saying about the services of the company.
The Bottom Line on Hard Money Lenders
Hard money loans can be a good way of securing finances if you’re unable to qualify with the traditional options. However, these loans usually come with a high-interest rate, and there’s a significant risk if your investment is not successful. These loans are often best for experienced real estate investors. If you’re looking for an alternative type of loan because a traditional bank denied your mortgage application, consider improving your credit history or applying for a loan program like the FHA loan.