A hard money loan is a loan secured by a hard asset, a real asset that provides a benefit to easily repay the loan. In comparison, a typical mortgage is guaranteed by the value of the property and backed by the willingness of the homeowner to repay the debt over 15 to 30 years in annual installments.
Hard money loans are a type of private loans that, as opposed to government-regulated financial services, are supported by private lenders with financing. Basically, hard money lenders do just what banks do: loan money.
The distinction lies in the terms of the loan, the approval process, and the intent of the loan.
Who uses loans for hard money and why?
Real estate developers who need short-term funds for an acquisition deal use hard money financing. Nice sales go easily and cash is king. Your bid to buy a house would not be competitive if you don’t have access to enough cash to completely finance the transaction.
Loans of hard currency have been the go-to for house flippers who can’t borrow a bank’s money. It may be because their credit is not perfect or that the offer does not follow the stringent requirements of a typical lender.
The cost of real money for the borrower for these reasons, the interest rate, and the loan origination charge are higher. To reimburse the lender for the increased cost of the contract, the prices are higher.
How are loans for hard money different from conventional loans?
There are some notable distinctions between more conventional loans and hard money:
- The terms of hard money loans are 6 to 18 months, while conventional loans are usually inflated over three decades.
- Usually, hard money loans have an interest rate that is approximately higher than conventional loans.
- Hard money loans are for short-term borrowers, while conventional loans are for assets occupied by the owner.
- Hard money loans are backed as collateral only by the property, while conventional loans are backed by the property and personal credit of the borrower.
Is it worth getting a hard money loan?
We all know it is indeed a risky endeavor when investing in real estate. Properties are pricey investments to purchase and sell and you need to have immediate access to a lot of cash to find the best offers. For decades, hard money loans have been around and they offer a fantastic source of finance for shorter-term real estate projects such as flipping homes. Using hard capital will give investors leverage to make bigger deals and it is important to create wealth using leverage carefully.
Real estate investments are all about the percentages. If you don’t have buckets of cash lying around, the cost of a hard money loan or some other form of funding is yet another cost that needs to be applied to the equation when deciding if the offer will generate the return you need to reach the investment goals.
