Hard Money 101

Do you need quick funding to finance your next real estate flip or real estate acquisition? Hard money loans may be a short solution for financing, refinancing, real estate purchases when you don’t qualify for conventional financing, or when time restraints make qualifying for conventional financing unrealistic.  Despite the name, hard money can be easy and quick to attain.

What is Hard Money?

A hard money loan is a loan secured by real assets.  In the case of most hard money lenders, the real asset is in the form of real estate.  Hard money loans are typically provided by a private firm or company but can be from an individual as well.  The term of the loan is typically short from a few months to a few years. The underwriting process for hard money loans also differs from a traditional lending source.  

Anyone who has ever applied for a loan with the bank knows how invasive and time-consuming a traditional lender’s underwriting process is; hard money lenders are typically more flexible in their underwriting process which allows them to make decisions on loans much faster. Like traditional lenders, there are a variety of hard money products out there.  

However, hard money loans are typically short-term, interest rate-only loans that include fees on the front end and often do not have pre-payment penalties. The interest rate on these types of loans is usually higher than a conventional loan.  This is because hard money loans are generally (but not always) loans that do not qualify for traditional lending and are considered higher-risk loans.

How Does Hard Money Work?

Hard money, simply put, is an opportunity to borrow money made with collateral that you own, or are trying to acquire.  In the world of real estate secured hard money lenders, there doesn’t seem to be convention across the industry or among the various lenders, so you will likely have a hand in influencing your terms. 

Things that will impact the terms of a hard money loan are; how much of your investment is going into a deal, how much work you will be responsible for, your experience level, whether you worked previously with the lender, etc. These are all factors that determine what a borrower’s potential loan will look like. 

Hard money lenders are asset-based lenders, thus borrowers will likely need to pay a larger amount of the purchase price of the collateral than they would with a traditional lending source.  If you are purchasing a property with a traditional lender, they might lend 80% to 90% of the cost of the purchase.  If you are purchasing a property with a hard money lender, they will probably lend between 60% to 70% for the same acquisition.  

If timing is an issue, hard money is a great resource. Hard money lenders vary in their underwriting process, but one of their most attractive qualities is the speed at which they can underwrite and fund a loan.  Instead of the weeks and months that it would take a traditional lender, hard money lenders can typically do it in days or weeks, depending on the property and the lender.

When Does a Hard Money Loan Make Sense?

For experienced investors, there are myriad ways in which hard money would make sense for various business opportunities.  Hard money is a flexible and fast way to access funds.  For people just learning about hard money, here are some examples of opportunities and situations where it may make sense to pursue this type of loan:

Fix and Flips, Land Loans, Construction loans, when you have bad credit when a real estate agent needs to move quickly, when you need funds for a new business venture but your money is tied up in a property that you own, or when another lender has denied your loan request.

If you are considering one or multiple equity partners to provide you with enough funds to make a deal happen, talk to a hard money lender.  They may be able to help you keep a larger ownership percentage of your investment than if you take on equity investors.  

What Questions Should You Ask a Hard Money Lender?

Depending on your experience within your specialized area, you will want to know some basic points. These 5 basic questions will guide the discussion for terms that make sense. Think about these questions and what your make or breakpoint is when getting these answers before meeting or discussing terms with your lender:

1. Where does your source of funds come from, are you in control of decision making or are you subject to investor guidelines or whims?

2. What are your interest rates, terms, and fees for loans?

3. What is your loan to value limits for properties?

4. How will my experience level, previous financial issues, or other variables I bring to the table affect my loan?

5. What happens if I want to pay off my loan early?

How Quickly Can You Close on a Hard Money Loan?

Hard money loans almost always close faster than traditional loans because of the focus on collateral, or the relationship you’ve built with your lender. Lenders would prefer not to take ownership of your property, but they typically do not require the same type of loan application as a conventional lender, which might require years of financial records, statements, tax returns, etc. Many times, third-party items necessary for a hard money loan will determine how long it will take to close on a loan.  These can include title insurance, an appraisal (if required), insurance policies, etc.

Depending on the requirements of your hard money lender and whether some of these items are already in place will impact the speed at which a loan can close, however, it is not uncommon for hard money loans to close within days to weeks.

What Are the Costs for the Loan?

Hard money loan costs vary from deal to deal and from lender to lender, however, there are some common costs and some core factors that will impact these costs. While these are not universal, they are fairly common costs when dealing with a hard money loan. First, you will have closing costs that will typically be a combination of title work, attorney fees, and document preparation, as well as underwriting expenses.  

The lender will also typically charge points to close the loan.  Points are a term to represent a percentage of the loan, one point = one percent of the total loan amount. If it is a construction loan, there could be inspection fees. There could also be pre-payment fees as well if you want to pay off your loan before a certain point or before the full maturity.  

There are also lots of factors that will influence your costs as well including but not limited to: small LTV (loan to value), prior experience with real estate investment, experience with a particular lender, the property’s location, and quality of the collateral, etc.

In the end, if you find a lender that is willing to work with you on a deal you’ve found, make sure before you commit to a loan that that lender has explained the rate, term, and costs of the loan to you before closing the loan.  This is typically done with a lender’s term sheet which details the specifics of the loan.  

If the deal goes well, the expectation is that everyone makes money. If you’re looking for a hard money lender and you’ve found a deal, reach out to us, and let’s discuss.

Consider a hard money loan to fund one of your future real estate deals. The higher costs might seem scary at first, but the advantages of getting a loan funded quickly and gaining financing when all the banks have stated “No” will far outweigh the extra cost.  In the end, all lenders want you to be successful. The more successful you are, the more fruitful your relationship will be with your lender.