When considering a real estate project, whether as a borrower or an investor, "hard money" is a term you should be familiar with.
Hard money loans are considered to be "asset-based" lending programs. In layman's terms, this means that the dollar amount of the loan is primarily based on the value of the property pledged as security, not on your credit. For this reason, hard money loans can be great for real estate investors who are considering their next rehab or construction project. Other benefits of a hard money loan may include:
- Relatively quick approval and closing timeframes
- Limited documentation needed
- Forming a repeat relationship with a lender often makes the process even easier
Hard Money Lending for House Flippers and Developers
If you are looking to fund your next fix and flip or construction project, you likely know that speed and convenience are key - negotiating favorable purchases prices sometimes requires the ability to settle quickly and your time is always better spent focusing on your project instead of loan paperwork.
Hard money loans can be issued quickly for a few reasons.
Hard money loans can be issued more quickly than traditional bank loans because your lender isn't primarily basing its decision upon your income and credit profile. While your lender may certainly look at your income and credit, analysis of the property and your construction plan will be much more important. More importantly, today's banks are weighed down by the dramatically increased regulation placed upon them in the last decade, and these regulations often add weeks to the time required to close a loan at a bank. Because hard money lenders solely make "business purpose" loans that aren't covered by many of these regulations, the approval process at a hard money lender can be much simpler and straightforward.
Most hard money lenders also tend to be made up of small teams of experienced experts who can help tailor specific loan terms to your needs. You don't get this from large corporations with strict standards and little leeway.
Know Your Values
Because hard money loans aren't solely based on your credit score or creditworthiness, the value of the collateral you are leveraging for the loan is much more important. For this reason, hard money loans are typically made at lower loan-to-value ratios than bank loans. If you are unable to pay back the loan on the agreed upon terms, your lender can rest assured knowing that it can take ownership of the collateral and sell it.
According to The Balance, most hard money lenders keep loan-to-value (LTV) ratios relatively low, which is good for getting approved, but not so good for the value of your loan. Their maximum LTV ratio might be 50% to 70%, so you'll need assets to qualify for hard money. With ratios this low, lenders know they can sell your property quickly and have a reasonable shot at getting their money back.
The Price is Right
Do to the higher risks associated with hard money lending, hard money carry higher interest rates than traditional bank loans. For this reason, hard money loans are best for short-term projects where you expect to either sell or refinance the property at completion. Having said that, having access to an easy source of money can offset the higher borrowing costs when building and managing your real estate portfolio.
Due to their faster approval times and easier process, hard money loans can fill a gap in your lending needs that traditional loans can't. Carefully planning and scheduling your real estate project will not only help keep it on track to meet your goals, but will help you get the most value out of a hard money loan.