Hard Money Loans

Hard money loans are special loans that are designed for those with key opportunities in real estate, or, in some cases, those who are facing a critical situation. You won’t get a hard money loan from a bank or credit union - hard money loans are solely the realm of private lenders. Hard money lenders are an elite class of lenders who extend loans to borrowers that not even the bravest of subprime mortgage lender would touch. Hard money loans, sometimes referred to simply as “private money” or “private home loans,” are not designed for long term investments, as typical 30-year mortgages or even 5/1 adjustable rate mortgages are. Instead, they are meant as a quick fix - fast money to help you out of a sticky situation or to capitalize on a rare opportunity. In this way, hard money loans are similar to bridge loans, in that they are supposed to “bridge” you from one circumstance to another, rather than stay on the books for years and years to come.

Who Needs a Hard Money Loan?

By nature, hard money borrowers are extraordinary. There is no typical hard money loan because there are no typical hard money borrowers. Situations run the gamut, from a borrower looking to escape foreclosure to someone looking to make a quick purchase within just a few days. This happens often in commercial real estate deals, where the seller is motivated to get rid of the property fast. A hard money lender can make it happen without going through all the hoopla that a traditional lender would. But of course, the costs of a hard money loan are astronomical when compared to other loans.

Hard Money Loan Costs

Hard money loans are risky. To balance out that risk, a hard money lender applies stringent terms, usually beginning with an interest rate that’s well into the double-digits. You won’t get a discount because of your credit score, because the profitability of the deal relies solely on whether you execute your plan successfully. Hard money loan interest rates are usually 12 to 18 percent, but they can be much higher. Furthermore, the loan will usually have a balloon payment within the first 1 to 2 years (i.e. the entire amount of the amortized loan becomes due). The loan to value ratio is often below 70 percent, sometimes going as low as 50 percent, depending on what the hard money lender thinks he can get if he forecloses on the home. Lastly, you’ll likely have to pay 4 to 8 points on a hard money loan.

Qualifying for a Hard Money Loan

Hard money loan borrowers are vetted on a case-by-case basis, but don’t expect to get a second mortgage. Hard money lenders prefer to have a first position lien on the property, meaning that they’ll get first dibs on remunerating their losses if you default. The hardest part of getting a hard money loan is actually finding a hard money lender. There are no federal standards or regulations dictating whether or not a hard money lender gives you a loan - it’s all up to their own judgment and whether or not they think they’ll lose money by giving you a loan.

The best way to find a hard money loan is to get a referral from a trusted source. Real estate investors, commercial real estate agents and house flippers may be good sources, since they may deal with unusual mortgage situations often. Beware of predatory lenders masquerading as a hard money lender. While hard money lenders impose strict terms, they don’t want you to default. Predatory lenders, on the other hand, often “loan to own” by stacking the cards against you. Do the math and make sure you’re not digging yourself a deeper hole before signing on the dotted line. It’s a good idea to work with a qualified mortgage broker who can help pair your needs with the right hard money lender. This introduces an additional layer of reputability as you search for a hard money lender in your area.