What is Hard Money Lending? A Guide

hard money

Did you know that more than seven million homes are sold in the US each year? And a fair number of those homes are sold by flippers.

Flippers are the brave souls who buy outdated, and sometimes completely distressed properties, pour money into them, bringing them back to a useful and enjoyable condition.

They can then sell the house for a profit to a new family looking for their next home. It benefits both them and their community, making it a win-win.

Many house flippers will use hard money to finance the endeavor. What is hard money, and is it a good option for you as an aspiring flipper? It may or may not be just what you need.

Keep reading below to learn more about hard money and current loan rates to see if it’s right for you.

Why Traditional Financing Isn’t Always an Option

If your real estate ambitions involve buying a home and holding onto it for years, while renting it out, then a conventional mortgage is a great idea. You want a long-term loan with a low-interest rate in order to ensure monthly profitability.

But if the goal is fixing up a property and selling it for a profit, then mortgages don’t usually make sense. Why go through the 1-2 month long process of obtaining a mortgage, only to sell the property a few months later?

And since the goal of fix and flips is to buy outdated homes, mortgage lenders are unlikely to finance the property anyway, since it will be in disrepair. Traditional mortgage lenders don’t provide mortgages on rundown properties.

Flippers have unique needs, and thus need different financing options than long-term buy-and-hold investors.

What Is Hard Money?

Hard money loans are a type of loan not offered by a traditional bank. They are not mortgage loans, and they aren’t provided by the same lenders that mortgage loans are.

Rather, hard money lenders are often individuals, private investors, or a group of investors who have started a hard money loan company.

Hard money loans are short-term loans specifically intended for flipping a property. The money is used to purchase a house and finance the cost of rehabilitation.

The goal of every hard money loan is to be paid back within just a few months. However, the timeline is typically available for up to a year.

Hard money lenders aren’t concerned so much with the borrower’s credit score or their current level of income. Rather, they look at the current value of the property compared to the after repair value (ARV) to determine if the particular deal is a good deal.

Hard money loans are all about the property, not the borrower.

Benefits of a Hard Money Loan

So why would you want to consider this type of private lending for your next real estate investment?

Hard money loans are fast to get. Many people can receive the funds from a hard money loan in just a few days, compared to more than a month that a conventional mortgage would require.

This would allow a borrower to get a property under contract, then apply for a hard money loan to pay for it.

Loan terms are also easier to negotiate. Since you are dealing with private lenders and not corporate banks, you can likely meet in the middle to find terms that benefit the lender and the borrower, depending on the specific project at hand.

Also, the property acts as collateral. The loan is secured. Although hard money rates are higher than traditional mortgages, they are still much more affordable than other financing methods like credit cards.

Hard money loans also eliminate red tape. There are very few complicated requirements. There’s no debt-to-income to worry about. No need to consider LTV. And You can use the loan to buy distressed properties that other lenders won’t touch.

This creates the most profitable flipping opportunities.

Cons of Hard Money

Hard money isn’t all fun and games, however. There are some important factors to consider before taking out this type of loan.

Interest rates are much higher on hard money loans than traditional financing methods like a mortgage or home equity loan. Rates often start at 10%. But given that the loan will only exist for a few months, the cost is doable for most investors who can ensure they sell the property for a profit.

Also, the timeframe for hard money loans is much shorter. The loans usually range from six to 18 months. So you can’t really take your time. When you take out a hard money loan, you need to finish your project as soon as possible.

Alternatives to Hard Money

Typically, you pursue a hard money loan if you can’t secure other forms of financing. For many real estate investors, hard money is the last resort, due to the higher rates and shorter timelines.

However, many borrowers prefer the speed of hard money and use it as part of their flipping strategy.

But hard money isn’t for everyone. So what should you consider if you don’t want to mess with hard money?

If you already own a home, you can consider using your equity to fund your next deal. By taking out a home equity loan or HELOC, you can enjoy funds at a low-interest rate, without the pressing timeline of a hard money loan.

If your credit score is impacting your ability to secure a traditional mortgage, then a program like FHA could be a good choice.

And if none of these options work, there are mortgage lenders out there who specialize in non-conforming mortgages. These are much more flexible than traditional mortgages but often come with a complex application process and higher interest rates.

Hard Money Is Perfect for Flippers

So what is hard money? It’s a type of loan geared towards fix-and-flip deals. They are short-term loans with high-interest rates that are perfect for those looking to buy a distressed property, fix it up, and sell for a profit within a few months.

Funds from hard money loans are available in days, not months. And if you know what you’re doing, you can get as many hard money loans as you want.

Looking for more investment tips like this? Visit our blog now to keep reading.

The views expressed in this article are those of the authors and do not necessarily reflect the views or policies of The World Financial Review.