What is Hard Money?
A hard money loan is one that is backed by a physical asset, such as a real estate property, rather than on borrower’s income or credit. Hard money refers to the material, legal tender. These types of loans are popular in investment property real estate transactions. This is because the property is used as the collateral to secure the loan. In the case of hard money loans, the value of the collateral is more important than the borrower’s financial position.
When to Use a Hard Money Loan?
Because the loan uses a physical asset as collateral rather than being based on the borrower’s financial position, hard money loans have a simpler and quicker approval process. As many people know, the traditional bank loan process is painstakingly slow. This fast approval process is useful when dealing with a small timeframe.
These loans typically have shorter terms than traditional bank loans. These shorter terms mean that the borrower needs to repay the loans more quickly.
Individuals or companies issue hard money loans, rather than banks. This difference works in the borrower’s advantage by providing more flexibility in loan terms and negotiation. In hard money lending, lenders evaluate each loan rather than following a standardized underwriting process. The borrower and lender can come to an agreement together that will be fortuitous for both parties involved.
Two significant differences in hard money loans are higher interest rates and lower loan-to-value (LTV) ratios. Higher interest rates are a result of the higher risk taken on by the lender. Even though a physical asset serves as collateral, the lender must also provide short turnaround times, physical, legal tender, and other services to assess the security behind the loan.
Because the physical asset is the collateral, a lender will generally provide a loan of 50-90% of the value of the property. This lower loan-to-value ratio protects the lender. In the case of a default, the lender will be able to recoup much of their loan through the sale of the physical asset.
Who Needs a Hard Money Loan?
Real estate transactions are popular for hard money loans. House flippers generally need cash to purchase a home quickly and expect to sell it quickly, as well. A traditional mortgage is better suited for people who plan to buy a home and live in it for an extended period. House flippers can develop a relationship with individual lenders to speed up the loan process even more. This speed cuts down time spent in the transaction and can increase the borrower’s return on investment.
A hard money loan can also act as a bridge loan in between buying one house and selling another. For those moving homes in a seller’s market, it can be advantageous to use this type of loan. They can purchase a new home once found, then the borrowers can sell their current home and repay the loan. This method allows the borrower to use the equity in their present home to purchase a new one before the current one sells.
Hard money loans also include equity loans, rehab loans, or other types of loans where the real estate property is used as collateral.
How to Get a Hard Money Loan?
The best way to get a hard money loan is to look for hard money lenders and begin to develop a relationship with them. Since lenders are individuals, the loan process goes much quicker when they already know and trust the borrower. If you are searching for a hard money lender, contact Park Place Finance, and we can begin working together.