Hard money loans are short-term products private lenders provide instead of traditional financial institutions. 

They’re a favored choice for real estate investors but also increasingly preferred for borrowers with assets but below-average credit. Visit https://www.mashvisor.com/blog/hard-money-loans-for-real-estate/ to learn the benefits and downsides associated with private lending. 

What Is Hard Money Lending

Hard money lending, also known as bridge loans, are short-term products that are a common loan solution for investors, including developers or investors working in real estate, as well as those facing foreclosure.

Private lenders or investor groups serve as the funding source instead of a traditional financial institution like a bank. The lenders expect real property or equity as collateral for the funding. 

Most often, the property the loan funding secures the loan instead of assessing creditworthiness or the borrower’s financial profile. Loans are generally based on the property value, and repayment terms are typically brief, several months, but at most a year.

For this reason, the popular crowd reaching out for this funding are investors who buy properties with the intent of a fast renovation and resale. The lenders find these borrowers a valuable opportunity since they can likely get repaid relatively quickly.

Expectations When Considering Hard Money

With a bridge loan or private lender, the loan process is distinct from that of a traditional lending institution. Here are a few things to be mindful of if you’re considering this option.

• Payday lending comparisons:  Hard money loans are similar to payday products in that there are minimal regulations or oversights.
• Interest rates: The lender with these products assumes a greater risk, leading to most attaching a higher interest rate for the borrower. Lenders use discretion in assessing the risk and securing a rate to accommodate that.
• Terms: These product terms range from several months to a few years, keeping them brief, paid back quickly.
• Criteria: It’s at the lender’s discretion to determine adequate creditworthiness and DTI – debt-to-income ratio in order to move forward with the loan approval.

Who Are the Hard Money Loans Most Suited For

The ideal candidates or those who commonly pursue these lending products are often investors that fall into the following categories:

• Buy-and-flip properties
• Ineligible for traditional financing
• Homeowners with substantial equity in the property and inevitable foreclosure

Property flippers

Often, people who invest in properties solely intending to renovate and resell them will pursue private lenders. They prefer hard money loans because the availability of cash is fast, which is beneficial when they’re in the throes of a bidding war on a property.

These clients will have the edge over those using traditional financing since closing can take as long as a month.

Ineligible for traditional lending

Traditional financing can be complex, and not everyone will meet the criteria. You may have had a recent divorce that affected your capacity to document your income fully or affected your creditworthiness. 

It’s not always cut-and-dry as a business owner either to attempt to prove income. A self-employed individual could easily afford a mortgage considering all their deductions, but taxes do not reflect that. Their only viable option is a hard money loan.

What Are the Benefits and Disadvantages of Hard Money Lending

Before considering any loan product as an investor, business person, or even average individual, it’s essential to weigh the benefits and downsides of the one you’re leaning toward before committing. Read here for the advantages and downsides you can expect from private lenders.

For private lending, as opposed to traditional financial institutions, borrowers note the following pros and cons.

Pros

• Flexible terms:  Most private lenders are flexible when negotiating lending terms. These providers don’t need to adhere to the regulations that guide traditional lending programs.
• Rapid disbursement: Traditional mortgage underwriting follows its own “glacial pace,” whereas private lending has a much more flexible and relaxed process. For real estate investors, a fast response is all the difference when finalizing a deal, such as a competitive real estate bidding at auction.
• Credit history: With hard money lending, creditworthiness, and financial status is not the primary consideration. 

Traditional financial institutions focus on these criteria, while private lenders provide funding based on assets such as the property being used for collateral. That means having a clear understanding of the ARV or after-repair-value.

Cons

• Higher costs:  Hard money lending is considerably more expensive than standard financial loans. The interest rates are often several points higher due to the greater risk assumed by the loan provider along with the upfront fees, which can range as great as five + points. 

The closing costs are relatively high, as is the expected down payment. Some loan providers charge a prepayment penalty if the loan is paid before the predetermined term date. This adds to the loan cost substantially.

• LTV – loan-to-value ratio (conservative): Significant assets are required to meet the criteria for hard money lending. The ratio must fall in the range between 50 and 70 percent. That’s conservative compared to a traditional platform where the range can run from 75 to as high as 97 percent.

• Regulations: Private loan providers are held to stringent state and federal laws, barring them from providing loans to individuals who present as unable to afford to repay the loan balance. The lender needs to establish that the client can make the repayment and any scheduled balloon installment.

Final Thought

Borrowers must meet certain eligibility criteria distinct from one loan provider to the next. These include the following:

• Roughly 20 percent of the loan amount as a down payment
• Falling within the qualifying credit limits set by the lender
• Prove income with pay stubs or W2s
• DTI – Debt-to-income ratio within a reasonable range, below 35 percent

Once the hard money loan details have been reviewed, it can close as soon as a few days or take up to roughly ten days, depending on the circumstances. It’s a far faster process than a standard mortgage purchase which can take as long as between 30 and 45 days.