Hard money is a way to borrow without resorting to traditional mortgage lenders. The loans come from individuals or investors who lend money on the property you use as collateral.
When loans need to be made quickly or when traditional lenders do not approve a loan, hard money may be the only option. Let’s review how these loans work.
What is hard money?
Most loans require proof that you can repay them. Usually, lenders are interested in your credit ratings and your disposable income to repay a loan. If you have a strong history of responsible borrowing and are able to repay your loans (measured by your debt ratio), you will get approval for a loan.
Getting approval from a traditional lender is an extremely slow process, even with high credit ratings and a lot of revenue. If your credit reports contain negative items (or income that is difficult to verify to the satisfaction of your lender), the process takes even longer and you may never be approved.
Hard money lenders take a different approach: they lend based on the guarantees given, and are less concerned about your ability to repay. If something goes wrong and you can not pay back, the hard money lenders plan to get their money back by taking the guarantee and selling it. the value of the guarantee is more important than your financial situation.
Hard money borrowing is generally short-term, with a term of one to five years. Either way, you would not want to keep them much longer, since hard money interest rates are generally higher than those of traditional loans.
Why use hard money?
If hard money is expensive, why would you use it? Hard money has a place for some borrowers who can not get traditional financing when they need it.
Speed: As the lender is primarily focused on collateral (and less concerned about your financial situation), hard money loans can be closed faster than traditional loans. Lenders prefer not to take ownership of your property, but they do not need to spend so much time processing a loan application with a fine-tooth comb – checking your income, reviewing bank statements, and so on. Once you have established a relationship with a lender, the process can be done quickly and allow you to close transactions that others can not complete (which is particularly important in hot markets where there are multiple offers) .
Flexibility: Hard money contracts can also be more flexible than traditional loan contracts. Lenders do not use a standardized underwriting process. Instead, they evaluate each transaction individually. Depending on your situation, you may be able to modify items such as repayment schedules. You may be borrowing from someone who is willing to speak – not from a large company with strict rules.
Approval: The most important factor for hard money lenders is the collateral. If you buy an investment property, the lender lends as much as the property is worth it. If you have to borrow against a different property that you own, the value of that property is what matters to the lender. If your credit report contains foreclosure or other negative elements, it’s much less important – some lenders might not even look at your credit (although many lenders will ask about your personal finances).
Most strong money lenders maintain relatively low loan-to-value ratios (LTV ratios). Their maximum LTV ratio can range from 50% to 70%. You will need assets to qualify for money. With such low ratios, lenders know they can sell your property. quickly and have a reasonable chance of getting their money back.
When does hard money make sense?
Hard money loans are the most useful for short term loans. Fixed investors are a good example of hard money users: they own property just long enough to increase their value – they do not live there forever. They will sell the property and repay the loan, often within a year or so. It is possible to use a lot of money to enter a property and stay there, but you would like to refinance as soon as you can get a better loan.
Disadvantages of hard money
Hard money is not perfect. Although it sounds simple – an asset secures the loan so everyone is safe – hard money is only an option. It’s expensive, so things have to work as planned so that the profits materialize.
Hard money works differently than loans you may have used in the past: lenders can use more conservative methods to value property than expected.
Cost: hard money loans are expensive. If you can qualify for other forms of financing, you can get these loans. For example, FHA loans allow you to borrow even with less than perfect credit. Expect to pay double-digit interest rates on hard money, and you could also pay origination fees of several points to finance.
If you can not get approval for a loan because your property needs serious repairs, an FHA loan of € 203,000 could finance the rehabilitation at a lower cost.
Find hard money lenders
To borrow money, you must connect to investors. To do this, find out who in your area lends money on the basis of a guarantee. Local real estate agents and real estate investor groups are a good source of names. Contact a few lenders, discuss your needs and develop a relationship that will allow you to fund projects quickly and easily when the time comes.