People often talk about hard money loans, but what exactly is a hard money loan? If you are a real estate investor, you are probably one of the few people who totally get what a hard money loan actually is. The reason for this is that most hard money loans are backed by real estate as an asset.
In a previous Rules of Thumb blog post, we explained the difference between a private loan and a hard money loan. Hard money loans are also known as asset-based loans, bridge loans, or STABBL loans (short-term asset-backed bridge loans). Hard money loans are used for short-term financing, and the loans are always secured by an asset. Traditional financial institutions don’t offer hard money loans, so this lending option is only available through private lenders and individual investors.
Hard money loans are a quicker and easier way to secure an investment purchase without the need for traditional financing or the approval process that is required by typical financial institutions. Since these types of loans are asset-based, they are not contingent on the borrower's creditworthiness.
When might it make sense to use hard money in real estate deals?
In this article from Forbes, author Michael Ligon says this about hard money loans, "The purpose of using these types of loans is to secure a property to renovate or develop and ultimately sell it for a profit. An investor might choose a hard money loan over a conventional loan because of the ease of access to the funds. Lending options from financial institutions often have complicated approval processes and weigh heavily on the borrower for approval. Hard money loans are asset-based and typically secured by a mortgage, so their approval process is much faster. In my experience, lenders will review the subject property and can make a lending decision within days."
What are points and interest rates on hard money?
Mr. Ligon goes on to say, "Hard money lenders typically charge fees to the borrower for providing the loan. These fees are called “points.” Points on a hard money loan are generally equal to one percentage point of the loan but can range anywhere from 2% to 4% of the total amount loaned. Interest rates on a hard money loan can vary greatly depending on the lender and the deal. Most hard money lenders will provide loans with a fixed interest rate. However, in some cases, you might be able to negotiate a floating rate. Traditionally, hard money loans carry an interest rate of 10% to 15%, depending on the lender and calculated risk of the loan.
What are the borrower requirements for hard money loans?
Hard money loans are supplied by private individuals and companies, so the loan requirements can vary greatly between lenders. However, since the borrower often deals closely with, or directly with, the lender, there's often much more room to negotiate terms. If it’s your first time requesting a loan, you’ll likely have a harder time getting approved and might need to supply additional information that a veteran investor would not have to supply. In consideration for a hard money loan, most lenders will review the borrower's investment history, verify the property values for the asset in question, and, under normal circumstances, require a 30% to 40% down payment to secure the loan.
In conclusion, you can see that a hard money loan does have a much higher interest rate, but the advantages of the speed of approval and the lack of government or traditional financial institutions rules and regulations make a hard money loan very attractive for real estate investors.
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