What is a Hard Money Loan?

What is a Hard Money Loan?


Buying real estate as an investment can be an emotional experience. After all, you may have a lot of money already invested in a property through earnest money, third party reports and more. You may also have high hopes of turning an incredible profit through your investment strategy for the property. Clearly, you have a lot to lose if you do not find the right financing for your project, and it can be devastating to learn that your project cannot be funded through a bank loan. You may think that no bank will touch your loan request, and this may actually be true. However, a hard money lender may provide you with the funding that you need to move forward with the project.

Hard Money Loan


What Is Hard Money?


You may have heard about hard money loans in passing, and you may have heard that they have very short terms and high interest rates. These two facts may have kept you from researching hard money loans any further. After all, why would you apply for that type of loan when a bank loan has a longer term and a lower interest rate? The answer is because banks will not fund all loan scenarios, and this includes loan scenarios that could result in a huge profit for you. Bank loans are institutional financing products that must comply with pre-established loan terms and guidelines. If not, the loan request is declined. Bank loans offer no flexibility. Hard money loans are private loans, and this means that a private lending company or even a private individual investor have the freedom and flexibility to determine if your loan request has merit. They are lending their own money, and they see issuing a loan to you as an investment opportunity. They are just as eager to fund a reasonable deal that makes sense as you are to take out the loan.


What Are Hard Money Loans Used For?


As you might imagine, a hard money loan is typically used when a bank loan will not suffice. Bank loans can take months to close, and a hard money loan only takes a couple of weeks. Therefore, hard money loans are usually used when timing is essential, such as with a 1031 exchange. Hard money loans are also used to fund projects that banks cannot lend on, such as rehab or flipping projects. A hard money loan has a short term that is usually less than 18 months. It also typically has a balloon payment. Because of these facts, hard money loans are used when the borrower has a short-term exit strategy in mind. For example, the borrower may plan to fix the property up and sell it for a profit within a few months. The borrower may also plan to renovate the property and to take out a permanent bank loan once the work is completed.


How Can You Get a Hard Money Loan?


If a hard money loan sounds like a smart idea to you, you understandably want to know if this is a financing solution that is suitable for you. In many cases, a hard money lender wants to review concrete details about your project before showing interest. Putting together a loan request package with pertinent details in it is a smart initial step to take. Then, you can send this package to the hard money lenders that you are most interested in working with. Remember to thoroughly vet hard money lenders before providing personal documentation to them.


While hard money loans may be a new type of financing to you, many successful real estate investors have been regularly using hard money loans for decades. These loans can help you to fund amazing real estate projects that otherwise may be unavailable to you because of a lack of funding. Research hard money lenders today as a first step toward exploring this financing source in greater detail.