Hard money refers to a unique form of private lending where individuals or private companies offer short-term, asset-based loans, often secured by real estate. These loans are distinct from traditional bank financing and are typically used in real estate investments or situations where quick access to capital is essential. Here’s a comprehensive overview of what hard money is and how it functions:
Hard money loans are asset-based, meaning the loan is secured by the underlying value of an asset, typically real estate. The collateral, such as a property, serves as security for the loan, allowing the lender to mitigate risk.
Hard money lenders are private individuals, investors, or small lending firms. They operate independently or as part of small groups and are not affiliated with traditional banks or financial institutions. Private lending enables them to make lending decisions swiftly.
Hard money loans are short-term, typically ranging from a few months to a few years. They are not intended for long-term financing but are designed to address immediate financing needs.
Quick Access to Capital:
One of the primary advantages of hard money loans is their speed and accessibility. These loans are known for their rapid approval and funding, making them suitable for time-sensitive real estate transactions.
Hard money loans are commonly used in various scenarios, including:
- Fix and Flip Projects: Real estate investors use hard money loans to purchase and renovate properties with the goal of selling them for a profit.
- Bridge Financing: Borrowers use hard money loans to bridge financial gaps between property acquisitions, awaiting long-term financing or property sales.
- Property Acquisitions: Investors use hard money loans to secure properties quickly, especially in competitive real estate markets or when traditional lenders are hesitant.
Higher Interest Rates:
Hard money loans typically come with higher interest rates compared to traditional mortgages. These rates reflect the elevated risk taken on by the lender, as well as the expedited approval process.
Points are a one-time fee expressed as a percentage of the loan amount. Each point is equivalent to 1% of the loan amount. Hard money lenders commonly charge borrowers 1 to 5 points at the loan’s closing, which can significantly affect the upfront cost of the loan.
Loan-to-Value (LTV) Ratio:
The LTV ratio represents the percentage of the property’s value that the loan covers. Typically, hard money lenders finance a percentage of the property’s value, with the LTV ratio often lower than what traditional lenders offer.
Loan Origination Fees:
Some hard money lenders charge loan origination fees, covering the administrative costs of processing the loan. These fees are typically a percentage of the loan amount and can range from 1% to 3%.
Hard money lenders may require a property appraisal to determine the property’s current market value. The cost of the appraisal may be borne by the borrower and can vary depending on the property’s location and complexity.
Hard money lenders assess the risk associated with the borrower, the property, and the overall transaction. Borrowers with strong creditworthiness and properties in favorable locations may receive more favorable terms.