Hard Money Loans Explained For Beginners

Posted By max soni, On September 10, 2018

Many prospective real estate investors shake their heads upon hearing the term hard money. For many of them, it is a term they will not become familiar with until researching the world of real estate.

Hard Money: What is it?

Hard money loans are simply short-term loans used to purchase real estate. These loans differ from other real estate loan options in that creditworthiness is, for the most part, not a consideration. Instead, the property to be purchased is used as collateral for the loan.

These loans are usually funded by independent investors and not the banks and credit unions that provide funding for traditional real estate deals. A typical hard money loan term is 12 months but can be extended for as long as five years. The loan will often require that interest only be included in monthly payments. But in some cases, a portion of the principal may also be required. In all cases, a balloon payment is required at the end of the loan term.

A hard money lender will determine the amount of money it is willing to provide by the value of the property that is the subject of the loan. The property can be one already owned by the borrower or a property the borrower is presently seeking to purchase.

Property Types

Hard money loans can be obtained for basically any type of property. This includes single, commercial, and industrial properties. Some hard many lenders may concentrate on a particular type of property that is preferred by them. But a hard money lender can be found for all property types.

It may sometimes become more difficult to obtain a hard money loan for a residential property that will be occupied by the owner. This is because these cases involve added regulations. Additionally, most hard money lenders will only consider loans that place them in the first lender position.

Why Choose A Hard Money Loans

A major reason real estate investors opt for hard money loans is the speed at which funds become available. In many cases, funding from hard money loans can be obtained in a week. This is a big difference from the 30 to 45 days that is typical when dealing with conventional loan sources.

Hard money loans also make funds available to individuals that have been rejected for funding by banks and credit unions. These conventional funding sources consider a number of points to decide the worthiness of a loan requestor that is not concerning to hard money lenders. These issues include past credit problems and work history.

What Are Typical Uses For Hard Money Loans

Hard money loans are best used in cases where conventional funding sources fail to meet the borrower’s needs and loans are needed for only a short period of time.

Ideal situations for the use of hard money loans are:

  • Projects that include the fixing and flipping of properties
  • Loans for land
  • Loans for construction
  • When investors need to move quickly
  • When a buyer has issues with credit worthiness

Final Thoughts

Hard money loans, when properly explained, are not as complicated as many beginning real estate investors may believe. These loans are relatively easy to be approved for when compared to conventional loans. They are also excellent for borrowers that have been disallowed access to conventional lending sources. Hard money loans are also an excellent option for the real estate investor that needs to move swiftly on a property.